Re Best & Less (Wollongong) Pty Ltd; Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd

Re: DEPUTY COMMISSIONER OF TAXATION
And: BEST AND LESS Pty.. LTD. (WOLLONGONG, PENRITH, BANKSTOWN, NEWTOWN,
FAIRFIELD, MASCOT, TAMWORTH,), BEST AND LESS Pty.. LIMITED, BEST AND
LESS (PURCHASES) Pty.. LIMITED AND LILIESTRA Pty.. LIMITED and BRIAN, SILVIA
) Nos. G3140-3149 of 1991
FED No. 718

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J.(1)

HEARING

SYDNEY

#DATE 6:11:1991

Counsel for Deputy Commissioner
of Taxation : A. Slater

Solicitors for Deputy Commissioner
of Taxation : Australian Government Solicitor

Counsel for the first and second
respondents : T. Bathurst QC, A.J.L. Bannon,

R.J. Horsley

Solicitors for the first and second
respondents : Dibbs, Crowther and Osborne

Counsel for Mogul Stud Pty. Limited
and Ginges Holdings Pty. Limited : R.F. Edmonds

Solicitors for Mogul Stud Pty. Limited and Ginges Holdings Pty. Limited : Michael Dunkel and Co.

JUDGE1

The Deputy Commissioner of Taxation has applied to this Court to wind up ten companies in the group of companies known as the Best and Less Group ("the partnership companies"). They carry on business in partnership as retail clothing stores in three States of Australia ("the partnership"). There are 74 shops and the business employs some 1,800 people.

The Deputy Commissioner seeks to-day the appointment of a provisional liquidator to each of the ten companies. The companies oppose the appointments.
By consent, the ten applications for appointment of a provisional liquidator were heard together. This judgment is in respect of each of the partnership companies.
The total income tax due under amended assessments which were issued by the Commissioner in October 1991 in respect of the years of income 1 July 1975 to 30 June 1990 to the members of the partnership is $45,737,523.
The amended assessments followed a taxation audit conducted by the Deputy Commissioner of a number of companies and partnerships including the partnership companies with which these proceedings are concerned and the partnership of which they are members. It appears that the taxation audit is also concerned with the affairs of the shareholders and directors of the partnership companies and other companies and partnerships controlled by the same shareholders and directors or their relatives. The principal persons involved in the affairs of the companies appear to be Albert Scheinberg, his son Richard Scheinberg, Agnes Ginges, her husband Berel Ginges and Annette Dunkel, the wife of Michael Dunkel, the solicitor who has represented the taxpayers the subject of the audit in various meetings and in correspondence and litigation concerning the audit. Berel Ginges is the managing director of each of the partnership companies. I mention these matters because they are part of the background upon which the Commissioner relies to found his expressed concern that the assets of the partnership companies may be disposed of for less than full consideration and not on an arm's length basis, leaving the unsecured creditors, principally the Deputy Commissioner, without recourse.
The facts which I am about to state are said to give rise to this apprehension on the part of the Deputy Commissioner and underlie the application for appointment of a provisional liquidator.
On 29 June 1989 members of the partnership entered into an agreement with the State Bank of New South Wales ("the State Bank") for the provision of a commercial bill facility which was varied by deed dated 15 September 1989. Under this agreement bills were drawn to fall due in December 1991.
On 19 July 1991 the Deputy Commissioner informed the partnership companies, and other companies in the Scheinberg/Ginges fold that, as a result of the audit, assessments would issue soon to various members of the group which would involve a very large increase in the taxable income of various members of the group.
On 22 August 1991 the first of two lots of assessments to income tax were issued by the Deputy Commissioner to a company, Propend Finance Pty. Limited ("Propend Finance"), which is one of the companies in the Scheinberg/Ginges family group of companies and which is also the subject of the Commissioner's audit. These assessments had the effect, including penalties, of increasing the tax payable by Propend for the years ended 30 June 1982 to 30 June 1990 by $49,714,620.31.
On 5 September 1991 Mr Richard Scheinberg telephoned an officer of the ANZ Banking Group Limited ("the ANZ Bank") seeking standby facilities for the purpose of assisting Mogul Stud Pty. Limited ("Mogul Stud") in its proposed purchase of the debts due to and the securities held by the State Bank under the facility agreement with the partnership. Mogul Stud is a company having some affiliation with Mr Richard Scheinberg who is one of its directors. The purpose of the purchase was said to be that of restructuring the financing of the Best and Less Group.
On 3 October 1991 Mr Dunkel wrote to the State Bank confirming a conversation earlier that day that Mogul Stud wished to acquire the State Bank's debts and securities "as quickly as possible".
Also on 3 October, assessments to income tax were issued by the Deputy Commissioner to the members of the partnership for the years ended 30 June 1976 to 30 June 1989 payable on 7 November 1991, the amount payable under these assessments being in excess of $15m. Between 4 October and 29 October further assessments were issued by the Deputy Commissioner to the members of the partnership bringing the total tax under amended assessments in respect of those years and the year ended 30 June 1990 to $45,737,523.
On 11 October 1991 Mr Richard Scheinberg wrote to Mr Dunkel instructing him to take steps to appoint a receiver to the Best and Less Group after the acquisition by Mogul Stud of the State Bank debt and securities.
On 13 October 1991 Mr Richard Scheinberg and Mr George Jacobs (who is said to be a son of Mr Albert Scheinberg) as directors of Mogul Stud, resolved to appoint Mr Brian Raymond Silvia, a chartered accountant, as receiver and manager of the partnership companies "upon becoming mortgagee by virtue of having taken the above assignment", that is, the assignment to Mogul Stud of the securities from the State Bank. They also resolved that Mogul Stud indemnify Mr Silvia in relation to his appointment.
On 14 October 1991 Mr Dunkel on behalf of the Best and Less Group and of Mogul Stud wrote to the solicitors for the State Bank enclosing various executed documents to achieve the assignment and said that as "this matter is extremely urgent, we will be anxious to complete settlement tomorrow afternoon".
On 15 October 1991 settlement of the purchase by Mogul Stud of the State Bank's debt and securities took place. Mogul Stud paid the State Bank $20,072,032. Mogul Stud obtained the funds for this purpose by loan from Propend Finance (A.C.T.) Pty. Limited, a wholly owned subsidiary of Propend Finance (which in turn had borrowed $4.5m from the ANZ Bank) and a loan from Vanatu Pty. Limited, a member of the Scheinberg Group which in turn had borrowed funds from A. Scheinberg Holdings Pty. Limited, J. Hammond Investments Pty. Limited and Veradi Pty. Limited as trustees for Veradi Investment Trust and certain Scheinberg companies.
By letters dated 16 October 1991 (prepared by Mr Dunkel and signed by Mr Richard Scheinberg on behalf of Mogul Stud, and directed to each of the companies which had given security to the State Bank) demand was made for payment of the sum of some $20m.
Mr Dunkel prepared a letter dated 16 October 1991 signed by Mr Berel Ginges as managing director of the partnership and addressed to Mogul Stud which said, amongst other things:

"I wish to advise that none of the companies or the firm to which you addressed your demand is able to repay this sum ($20m) today or in the near future. Accordingly, I request that you appoint a receiver/manager to the companies and consequently the business of the partnership to whom you addressed your demand so that the position of the creditors can be protected. In the circumstances, the Board of Directors of each of the companies to whom you addressed your demand considers that it would, in any event, be unable to carry on business because each such company is unable to pay its debts."

Instruments of appointment of Mr Silvia as receiver and manager dated 16 October 1991 were executed by Mogul Stud under the security assigned to it by the State Bank.
The appointment of Mr Silvia as receiver and manager of 17 companies within the Best and Less Group including the partnership companies was announced by a press release published on 17 October 1991 in these terms:
"On 16 October 1991 Brian Raymond Silvia of Ferrier Hodgson and
Co., Chartered Accountants, was appointed receiver and manager
of seventeen (17) companies within the Best and Less Group and the
trading partnership 'Best and Less Retail stores' by Mogul Stud Pty..
Limited, a creditor seeking repayment of a substantial secured debt.
The directors of the Group maintain that the trading operations are
both profitable and viable. Accordingly, it is intention of the
receiver and manager to continue business operations 'as usual',with
a view to a restructuring of activities so as to satisfy the secured
debt."
Neither the State Bank nor the ANZ Bank nor the Deputy Commissioner was informed beforehand of the appointment of Mr Silvia as receiver and manager.
Mr Silvia gave evidence that since his appointment as receiver and manager he has formed the opinion that the business carried on by the partnership should be disposed of as a going concern and as one entity. He has therefore continued since the time of his appointment to carry on the business of the partnership. He says that:
"To enable the companies to carry on such business, orders totalling
$50 million have been reconfirmed since the date of my appointment.
If this had not been done it would have been necessary for the
businesses to have closed down. It has been necessary for suppliers
to be paid promptly."
As at 1 November 1991 some $3.3 million was immediately due to suppliers which he had proposed to pay that day. His removal as receiver and manager, an order sought by the Deputy Commissioner, would, he said, have prevented those suppliers being paid on time and might lead to a closure of the business. Further, the appointment of a provisional liquidator would in the opinion of Mr Silvia:
"cause disruption to the commercial relationship which I have been
able to establish with suppliers, a relationship which is essential
if the business is to be sold as a going concern. There was
considerable publicity following my appointment and suppliers were
initially apprehensive in continuing to supply goods to the group.
If a provisional liquidator was appointed my concern is that they
would refuse to continue supply. I am further of the view that the
appointment of a provisional liquidator may adversely affect the
affect the sale price of the business."
Mr Silvia has also sworn that the trade mark "Best and Less" is not held by any of the partnership companies, although the partnership has a registered user agreement with respect to it. To enable him to achieve the sale of the business as a going concern he has been having discussions with the registered proprietor of the trade mark, Gingis Holdings Pty. Limited, with a view to enabling the mark to be included in the sale. He says that these negotiations will be jeopardised if a provisional liquidator is appointed and that, if the mark is not offered for sale with the balance of the assets of the group, there will be a substantial diminution in the amount which will be obtained for goodwill. He says that the appointment of a provisional liquidator could in his opinion lead to disruption in the partnership business as a result of key employees leaving the business and seeking alternative employment. Some of the business's employees are employed not by the partnership, but by a separate company, Best and Less (Administration) Pty. Limited.
Mr Silvia says that, since his appointment as receiver and manager, both himself and his partner, Mr Warren Panzer, have discussed the financial position of the companies and his plans for them with officers of the Australian Taxation Office, and that they have not declined to give any financial information to them. In addition Mr Silvia has supplied the Australian Taxation Office with a copy of the draft partnership accounts for the year ended 30 June 1991.
On 23 October 1991 Mr Panzer, with Mr Silvia's consent, had a telephone conversation with an officer of the Australian Taxation Office. Mr Panzer told him that the Commissioner would be informed if any of the following events were "contemplated":
1. the "proposed disposal" of any of the assets of the seventeen

companies in the group for whom Mr Silvia has been appointed receiver by Mogul Stud including the partnership companies;

2. any proposed payments to any persons otherwise than in the course

of "business as usual";

3. proposed payments of any significant amounts;

4. any "contemplated activities" which could be classified as not

being in the normal course of "business as usual";

5. any "contemplated activities" which could be classified as being

different from those previously undertaken by the seventeen companies; and

6. the creation of any additional charges, liabilities or major debts

or any proposal to restructure any of the seventeen companies.

The Deputy Commissioner wrote a letter dated 23 October 1991 to Mr Silvia's firm confirming those arrangements.
Counsel for the partnership companies informed the Court to-day that Mr Silvia was prepared to give undertakings to the Court in appropriate terms being in substance those mentioned in paragraphs 1 to 6.
The Deputy Commissioner's case may be summarised as follows. The partnership companies and others in which the Scheinberg/Ginges family interests are closely interwoven are the subject of an audit by him which led to the issue of the annual assessments to tax which increased the tax liabilities of the partnership companies by some $45m. The tax liabilities have caused the partnership companies to be insolvent, so prima facie they should be wound up. In the meantime a provisional liquidator should be appointed to protect the interests of unsecured creditors. The bill facility previously made available by the State Bank has gone and in its place is a secured creditor (Mogul Stud) owed some $20m by the partnership companies, and Mogul Stud is controlled by the Sheinberg/Ginges interests. Mogul Stud acquired the interest of the State Bank after the partnership companies knew of the Commissioner's pending assessments to tax in very large sums. Soon thereafter the rearrangements of the security took place without notice to the Deputy Commissioner. Although Mr Silvia is an official liquidator and no improper conduct on his part is suggested, he has nevertheless been appointed by Mogul Stud which has also indemnified him and he owes his primary duties to the secured creditor. I should add that the Deputy Commissioner also seeks an order that it be declared that Mr Silvia has not been validly appointed receiver and manager of the partnership companies and a consequential order that he account to the provisional liquidator for all assets of the companies which have come into his hands or under his control during his receivership. These two lastmentioned orders are not pressed at this stage.
Mr Silvia's views, as expressed in his affidavit and oral evidence today, have not been challenged by other evidence. In his opinion the partnership company should be sold as a going concern to realise the maximum moneys. He has consulted Messrs Coopers and Lybrand about the best means of selling the business and to value the partnership business. He has written to the Deputy Commissioner stating that he will give proper notice of any proposal to dispose of assets, to make payments or to act otherwise than in the ordinary course of business which I assume has the same connotation as the expression in the correspondence "business as usual". Mr Silvia is prepared to translate those statements into appropriate undertakings to the Court. I am not satisfied that Mr Silvia will refrain from acting in the best interests of the partnership companies. I cannot in the circumstances see that any useful purpose will be served by the appointment of a provisional liquidator.
Provided appropriate undertakings, in substance as foreshadowed by counsel for Mr Silvia, are given to the Court, I shall dismiss the motions to appoint a provisional liquidator of each of the partnership companies.
That leaves the other issues raised in the application to which I referred earlier and the substantive application to wind up the partnership companies. The applications to wind up have not yet been given a hearing date; but in the meantime the parties should direct their efforts to the final hearing of the applications to wind up as that hearing will determine the real issues between them.
To that end the following directions should be included in short minutes of order together with the agreed undertakings.
1. That each of the partnership companies, if it intends to appear at

the hearing of the application, should file a notice of intention to appear in accordance with Form 79 and to include in that document a concise and brief statement of the grounds upon which it proposes to rely in opposition to the application, if it intends to oppose the winding up of those companies;

2. Each of the partnership companies should file all affidavits upon

which it wishes to rely in support of its opposition to the application to wind up if it intends to oppose the same, on or before a date to be determined;

3. The Deputy Commissioner of Taxation should file and serve all

affidavits upon which he proposes to rely and in response to the affidavits of the partnership companies on or before a date to be determined; and

4. That the applications to wind up shall be listed for directions on

a date to be determined including a direction to fix the matters, for final hearing.

[1991] FCA 718

06 NOVEMBER 1991