Sevior v Morgan
[2012] VSC 480
•22 October 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. S CI 2012 03024
IN THE MATTER OF R.A.N.S. PTY LTD (ACN 006 363 657) (IN LIQUIDATION)
BETWEEN
| ROBERT WILLIAM SEVIOR | Plaintiff |
| and | |
| BRENT LEIGH MORGAN in his capacity as liquidator of R.A.N.S. Pty Ltd (ACN 006 363 657) (in liquidation) | Defendant |
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JUDGE: | SIFRIS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10 October 2012 | |
DATE OF JUDGMENT: | 22 October 2012 | |
CASE MAY BE CITED AS: | Sevior v Morgan | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 480 | |
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CORPORATIONS – Winding up – Termination of winding-up – Solvency – Public interest ‘commercial morality’ – Insolvent trading – Phoenix activity – Administrators appointed – DOCA passed at meeting – Application to terminate winding up granted – Corporations Act 2001 (Cth) – Section 482(1).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Fary | Madgwicks |
| For the Defendant | Mr C Brown | Williams Winter Solicitors |
HIS HONOUR:
Introduction
The plaintiff (“Mr Sevior”) applies under s 482(1) of the Corporations Act 2001 (Cth) (“the Act”) to terminate the winding up of R.A.N.S. Pty Ltd (ACN 006 363 657) (in liquidation) (“the Company”).
In support of the application, Mr Sevior relies on affidavits sworn by him on 28 May 2012 and 20 June 2012 and on the affidavit of Brent Leigh Morgan (“Mr Morgan” or “the Liquidator”), sworn 20 June 2012.
The application was listed for hearing on 22 June 2012 and was adjourned so that the Australian Securities and Investments Commission (“ASIC”) could make further enquiries. On 20 July 2012, the application was heard and was supported by the Liquidator. ASIC advised the Court that it had no continuing concerns and did not oppose the application. The application was dismissed by Efthim AsJ on 7 September 2012. The plaintiff appeals against the decision of Efthim AsJ. The appeal is by way of a hearing de novo. I gratefully adopt a summary of the relevant facts as set out in the judgment of Efthim AsJ.
Background
The Company was incorporated on 7 September 1994 to operate the electrical business of Mr Sevior. It became part of a group of companies (the Sevior Group) which carried on the business of electrical contracting and property development. A related application has been made for the termination of the winding up of Nickris Pty Ltd (“Nickris”). Nickris was the company in the Sevior Group that was engaged in property development.
Until 25 September 2009, the Company conducted the Sevior Group’s electrical contracting business. After 25 September 2009, the Company entered into a licence deed with two other companies being Schematic Electrical Pty Ltd (“Schematic Electrical”) and Thyristors Pty Ltd. It then ceased trading. It will be necessary to consider the arrangements between the Company and the new trading entity Schematic Electrical in some detail. The Liquidator, Mr Morgan, raised some concerns about alleged phoenix activity associated with Schematic Electrical commencing to trade under the business name RANS Electrical.
On 11 December 2009, pursuant to a resolution by its members, the Company was placed into liquidation and Mr Morgan of Rodger Reidy was appointed Liquidator of the Company.
At a meeting of creditors of the Company held on 14 March 2012, the creditors resolved to appoint the Liquidator as administrator of the Company pursuant to s 436B of the Corporations Act 2001 (Cth).
More than 2 years after the appointment of Mr Morgan as the Liquidator in 2009, Mr Sevior proposed that a Deed of Company Arrangement (“DOCA”) be entered into. The DOCA provides that:
-Mr Sevior contribute the sum of approximately $55,000;
-priority creditors, if any, to be paid in full;
-unsecured creditors of the Company would receive a return of approximately 15 cents in the dollar; and
-related creditors having claims in the vicinity of $660,000 would not be proved in the DOCA.
Mr Morgan has completed a report of creditors dated 11 April 2012, pursuant to s 439A of the Corporations Act2001 (Cth). In that report, Mr Morgan has identified that:
-there is a potential preference claim against the Deputy Commissioner of Taxation in the amount of $191,415;
-there is a potential claim against Mr Sevior in respect of director related transactions in the amount of $115,923;
-there is a possible claim against Mr Sevior for trading whilst insolvent in the amount of $283,153;
-Mr Sevior may have breached his duties as a director of the Company in various respects; and
-Mr Sevior may have engaged in alleged phoenix activity.
Mr Morgan deposed that he is confident that the action against the Deputy Commissioner of Taxation would be successful and would result in recovery but doubts whether any action against Mr Sevior would result in recovery. In relation to the alleged breaches of duty and phoenix activity Mr Morgan has referred the matters to ASIC. No action has been taken by ASIC. As pointed out, ASIC does not oppose this application.
Mr Sevior has sworn that he advised Mr Morgan that if proceedings were issued against him and such proceedings were successful, he would be unable to pay the amounts claimed. That is due to the fact that he has already personally paid creditors of the Company and accounted to the Company for assets that he has assigned to Schematic Electrical. Further, he has taken steps to address the alleged breaches of directors duty and alleged phoenix activity.
The legislation
The application to terminate the winding‑up is made pursuant to s 482(1) of the Corporations Act2001 (Cth) which provides:
At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the wind up on a day specified in the order.
The principles applicable are well established and it is often a question, as it is in this case, of the application of the relevant facts to the established principles.
In Gematech Pty Ltd v Bardi Investments Pty Ltd,[1] Hammerschlag J, after considering numerous authorities, referred to the factors which a court may and should have regard to when applying s 482 of the Corporations Act2001 (Cth) and stated:[2]
[1][2008] NSWSC 196 (“Gematech”).
[2]Ibid at [24] – [31].
[24]The approach to be taken by the Court to applications such as the present, and the factors to which the Court may and should have regard, have been the subject of consideration in the authorities: see Re Telescriptor Syndicate Ltd [1903] 2 Ch 174; Re Mascot Home Furnishers Pty Ltd [1970] VR 593; Re Data Homes Pty Ltd [1972] 2 NSWLR 22; Re Warbler Pty Ltd (1982) 6 ACLR 526; Dubolo Pty Ltd v Codrington Investment Corporation Pty (1998) 26 ACSR 723; Re Intag International Ltd (in Liq); Westpac Banking Corp v Intag International Ltd [1999] NSWSC 645; Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70; Anderson v Palmer [2002] NSWSC 192; Re Nardell Coal Corporation Pty Ltd (2004) 49 ACSR 110; Deputy Commissioner of Taxation v Biosolids Management Pty Ltd [2004] NSWSC 272; Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160; McConnochie v Lopez [2006] WASC 206; Deputy Commissioner of Taxation v Giumar Pty Ltd (in liq) [2006] FCA 101; Re The King & I Pty Ltd [2007] FCA 2085.
[25] Relevantly, for present purposes, two things are clear.
[26]Firstly, the solvency of the Company is to be demonstrated by the applicants who bear the onus to do so by leading the ‘fullest and best’ evidence of the company’s financial position: Commonwealth Bank of Australia v Begonia (1993) 11 ACSR 609. Proper verification of assets and liabilities is critical to rebut the presumption of insolvency. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of insolvency: Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2003) 45 ACSR 711.
[27]In QBE Workers’ Compensation Pty Ltd v P Russel Enterprises Pty Ltd [2005] NSWSC 1127 at [26] White J restated the correct approach as follows:
… the Court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation. That confirmation is typically obtained either from the liquidator of the company, if he has carried out sufficient investigations so as to put himself in a position to express an informed opinion, or from the evidence of an external accountant.
[28]Secondly, in considering the application, the Court is to have regard not merely to the interests of creditors but to the public interest, including whether granting the order would be detrimental to commercial morality: Re Telescriptor Syndicate Ltd; Re Mascot Home Furnishers Pty Ltd; Re Data Homes Pty Ltd; Re Warbler Pty Ltd.
[29]In the context of public interest and commercial morality Buckley J in Re Telescriptor Syndicate Ltd required to be satisfied that the trading operations of the company had been ‘fair and above board’ and that there was not ‘an ugly side to the picture’, see also Krextile Holdings Pty Ltd v Widdows [1974] VR 689 at 694.
[30]However, concepts of commercial morality and public interest are not narrow.
[31]In Re Data Homes Pty Ltd (which concerned the equivalent section in the Companies Act 1961 to s 482) at 26-27 Mason JA said:
But it should not be assumed that there is any sharp dividing line between considerations which are detrimental to commercial morality and those which are opposed to the public interest. They clearly overlap. Nor should it be assumed, as the appellant would have it, that each is a narrow concept for in truth they had designed to give expression to the very broad discretion which s 243 confers upon the court.
There is as little reason for confining considerations of commercial morality to the investigation of misconduct in the affairs of the company as there is for restricting the public interest to the pecuniary interests of existing and future creditors …
In Vonrisefer v Main Freight International Pty Ltd,[3] Ashley JA cited with approval the passages referred to by Hammerschlag J in Gematech.
[3][2009] VSCA 179.
In Stolar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq),[4] Ferguson J refused to terminate the winding up of a company for reasons including the “persistent failure by the director of the company to comply with statutory obligations” during the winding up and that there was insufficient evidence to establish that it would be anything more than barely solvent were it to commence trading again.
[4][2011] VSC 577.
In Re Kitchen Dimensions Pty Ltd (in liq),[5] Judd J terminated the winding up of a company. His Honour stated:
[5][2012] VSC 280.
[22]There are no clear categories in which courts have refused to terminate or stay a winding up because of concerns about commercial morality, where the company is otherwise solvent. In Re Data Homes Pty Ltd, Mason JA conceived of commercial morality and public interest as giving ‘expression to the very broad discretion’ conferred upon the court. However, Mason JA decided that commercial morality and public interest could be used to describe a situation where a company was perhaps technically solvent due to an agreement with creditors, but where its liabilities greatly exceeded its assets.
[23]In Krextile Holdings, while referring to commercial morality, Gillard J proposed a much broader test. His Honour proposed an all-encompassing test by asking – ‘[w]hat are the consequences that would flow from staying proceedings in this case?’ As with Re Data Homes Pty Ltd, this test recast the question of commercial morality so as to focus on the future, and in particular ask whether future creditors would be imperilled. Presumably it may also extend to whether a history of failure in meeting statutory duties would cause future difficulties. Gillard J found that:
The answer is simple on the evidence placed before me. The companies would continue their successful businesses with the present management and the present personnel without any risk to any creditor or any other person. The report of the liquidator that I required satisfies me that this is so. On the present position of the companies there could be no threat to the public interest. On the other hand, looking at the matter commercially and pragmatically, it could well be urged that it would be against the public interest to dissolve the companies and to close down or transfer to other ownership or management a business which has successfully catered for a large section of the textile industry for some years.
[24]Unsurprisingly, these cases have been applied in a variety of ways. In the recent decisions of Prendergast v Rolcross Pty Ltd (In Liq) and Apostolou v VA Corporation of Australia Pty Ltd, commercial morality was regarded as engaged where there had been serious impropriety or, expressing reasoning similar to Krextile Holdings, where future creditors were imperilled.
[25]In Apostolou, Finkelstein J considered that commercial morality was generally unlikely to trouble the court:
In considering whether it is in the company’s best interests to stay the liquidation, the liquidator will need to consider the factors relevant to the court’s discretion as regards whether to grant a stay. A stay order will usually be made if all creditors are paid out, the liquidator’s costs and expenses are covered and the members agree. It may be accepted that there will be exceptional cases where it would not be appropriate to stay the winding up of a company simply because it is solvent. For example, where it is “detrimental to commercial morality and to the interests of the public at large” a stay will not be granted: Re Telescriptor Syndicate Ltd [1903] 2 Ch 174 at 180. See also Re Warbler Pty Ltd (1982) 6 ACLR 526; Anderson v Palmer [2002] NSWSC 192.
[26]In Prendergast, White J was not persuaded that Telescriptor Syndicate should be employed as authority to find that a failure to meet statutory reporting obligations was indicative of a sufficient lack of commercial morality that a winding up should not be stayed:
As I read the judgment, it was not the failure of the directors to comply with their statutory duty to provide information to the Official Receiver and a report as to affairs which, by itself, was the occasion for refusing the stay. Rather those matters, amongst others, gave reason to apprehend that the affairs of the company and the conduct of its directors were not ‘fair and above-board’.
In the present case I do not consider that the orders sought should be refused as a mark of the Court’s disapproval of the directors’ conduct or to provide an additional sanction against non-compliance with statutory duties. The question rather is whether it appears that it would be, or may be, contrary to the public interest if the company were permitted to resume operations. In a case such as the present where all of the shares are held by the plaintiff, the pubic [sic] interest means primarily the interests of existing and future creditors.
[27]Under this conception of the law, Gematech Pty Ltd v Bardi Investments Pty Ltd provided an example of serious impropriety giving the court reason to consider commercial morality. There, Hammerschlag J found that:
In my view, the principal motivation on the part of Mr Crockford for casting the Company adrift was to thwart Gematech, leaving it with a judgment against a shell.
Hammerschlag J concluded that ‘to terminate the winding up would, in these circumstances, not be in the public interest, nor would it serve the ends of commercial morality’.
[28]Set against this background, which tends to focus broadly on the likely impact on future creditors, Tadgell J’s decision in Re Skay Fashions Pty Ltd (in liq) has sometimes been cited as authority for the proposition that previous neglect of obligations was sufficient reason to refuse an application to stay a winding up. Thus, in Metledge v Bambakit Pty Ltd, Barrett J found it convenient to employ Re Skay Fashions where the sole director ‘has shown himself to be unconcerned about the responsibilities that attach to the office of company director’. Yet, Tadgell J said, the court also has to consider whether the termination of the winding up will be conducive or detrimental to commercial morality and the interests of the public at large. It is a clear axiom that insolvent companies should be wound up and that they should stay in liquidation unless solvency can be demonstrated. If solvency could be demonstrated here, it would be no more than bare solvency. That is about as much as could ever be expected if an adjournment were allowed. The court would, if making an order to terminate a liquidation, probably, and in the ordinary course should, give directions for the resumption of management and control of the company by its officers. As I say, here I am given no information at all as to who might conduct the company's affairs or how they might be conducted. For all one knows, they would be conducted in the same sloppy fashion as they have been conducted heretofore.
[29]It was a lack of information, similar to that mentioned by Buckley J in a preliminary decision in Telescriptor Syndicate, which appears to have persuaded Tadgell J against finding that there was no danger to the public interest from staying the winding up. On this basis, Re Skay Fashions also indicated that it was the interests of future creditors for which Tadgell J was concerned, rather than punishing former directors for earlier failures. Chan v Austgrove Enterprises Pty Ltd (in liq) presents just such an example, where an indication that past practices would be corrected, including a failure to make an annual return, was material in persuading Seaman J to grant an application that the winding up be stayed.
[30]The most frequent references to a failure to lodge documents with ASIC or to file income tax returns and business activity statements, arise where a company has already been found to be insolvent, and the presence or absence of commercial morality was not determinative of a winding up being stayed.
[31]White J noted a failure to lodge business activity statements and income tax returns as relevant to the question of commercial morality in Re Enviro Energy Australia Pty Ltd (In Liquidation), but in that case, the company was also ‘clearly insolvent’. Similarly, Ashley JA in Von Risefer v Mainfreight International Pty Ltd considered that there was a lack of commercial morality where an insolvent company had failed to perform a variety of statutory obligations. They were,
(1)The company did not inform ASIC of the details of its registered office at any time after late 1991;
(2) The company did not provide regular reports of its affairs to ASIC after May 2003;
(3) The company had not lodged tax returns or business activity statements at any time after its commencement;
(4) The company was not shown to have any proper accounting records;
(5) The directors gave the liquidators minimal assistance in the latter’s attempts to ascertain the true position of the company.
I respectfully adopt the useful summary and observations made by his Honour. As the authorities emphasise, the critical focus of the application is on the future of the company and in particular the risk of danger to future creditors. Previous issues of non-compliance and breach by a company and its directors are relevant to the intended future operation of the company, particularly where the breach or non-compliance is sufficiently serious or persistent to the extent that the court can have no confidence that the restored company will continue to operate as a good ‘corporate citizen’ according to law.
Solvency
Mr Morgan is of the view that the estimated return to creditors in the liquidation would be 19 cents in the dollar. However, this is predicated on a full recovery in respect of claims brought against the Deputy Commissioner of Taxation and Mr Sevior. However, if the claims are unsuccessful or a judgment is unable to be satisfied by Mr Sevior, which appears to be the case, there would be no return to creditors in the liquidation. Further, he believes that there may be adverse cost consequences resulting from unsuccessful litigation.
In his report in relation to the DOCA, Mr Morgan has estimated a return to creditors at 15 cents in the dollar. According to Mr Morgan, the DOCA provides greater certainty in relation to a return to creditors and accordingly he recommended that creditors vote in favour of the DOCA.
Mr Morgan has confirmed that the voting of creditors in regard to the acceptance of the DOCA was as follows:
Rans Qty Value % of Value Total Creditors 10 945,431.11 Not voting 7 152,536.99 16% Voting Against 1 127,313.96 13% Voting For 2 665,580.16 70%
Rans (For)
· Robert Sevior $98,318.46
· Schematic Electrical $567,261.70
Rans (Against)
· Deputy Commissioner $127,313.96
As the related creditors were allowed to vote in regard to the acceptance of the DOCA, the DOCA was passed. Had Mr Sevior and Schematic Electrical not been able to vote, the situation would have been entirely different. The only non‑related creditor to attend the meeting, the Deputy Commissioner of Taxation, voted against the DOCA even though it may mean that the Deputy Commissioner of Taxation would be liable to pay a preference, if the DOCA was not accepted.
In relation to solvency, in his first affidavit, Mr Sevior swore that he considered that it was unlikely that the DOCA would lead to the Company becoming insolvent because if the Company was brought out of liquidation, the Company would not trade and he intended to deregister the Company once the terms of the DOCA had been complied with.
In his second affidavit, sworn 20 June 2012, Mr Sevior deposed that since swearing his previous affidavit he had obtained further legal and accounting advice. He deposed that although it remains his intention not to trade, he no longer wishes to deregister the Company after the requirements of the DOCA have been met. He has yet to decide what to do with the Company.
In terms of the related party debt owed by the Company to Mr Sevior and Schematic Electrical, Mr Sevior proposes to convert the debt into equity so as to ensure the Company is and remains solvent. He has been informed by his legal advisers of the process by which the related debt would be converted into equity.
In relation to the position of the creditors, Mr Morgan is of the view that the creditors will be better off under the DOCA because it is unlikely that Mr Sevior would be able to pay the amounts claimed in relation to director related transactions and trading whilst insolvent. If recovery was made of those claims, then the creditors would be slightly better off in the liquidation. Creditors were given the opportunity to vote in relation to the DOCA but apart from related creditors and the Deputy Commissioner of Taxation, none attended to vote. Not one creditor other than the related party creditors voted for the DOCA. The non‑related creditors have in effect shown no interest in the proposal.
The question of solvency is therefore not an issue for this application.
Commercial Morality and the Public Interest
In the context of the public interest and in particular commercial morality, a number of matters are relevant. The more important matters are the failure to pay tax, possible trading while insolvent and alleged phoenix activity associated with the new entity, Schematic Electronics, effectively taking over the business of the Company.
I note that the Company has not paid outstanding tax to the Deputy Commissioner of Taxation in the sum of $127,313.96. Further, if the liquidation is terminated, there will be no litigation against Mr Sevior for director related transactions and trading whilst insolvent. Mr Sevior has made payments of some debts but the payments fall short of what he may be liable for if claims were taken against him by the liquidator.
In his report dated 11 April 2012, Mr Morgan refers to “Alleged Phoenix Activity”. He states:[6]
I.4 Alleged Phoenix Activity
As discussed earlier, two new entities were established on 23 September 2009, under the names of Schematic Electrical Pty Ltd and Thyristors Pty Ltd. A search of the ASIC corporate database reveals that Mr Sevior is a director of both Schematic and Thyristors.
Schematic purchased the Company’s assets, continues to trade under the name ‘RANS Electrical’, and has transferred all employees in order to continue to trade, leaving behind unrequired supply creditors and statutory liabilities totalling $283,153.
Accordingly, I consider that Mr Sevior may have conducted an illegal phoenix by preferring various required trade creditors. My review in this regard has been reported to the ASIC and previously detailed to creditors.
[6]Exhibit ‘RWS-3’ to the affidavit of Robert William Sevior, sworn 28 May 2012.
Mr Sevior purchased the assets of the Company for $30,000 and the trading name on behalf of Schematic Electrical for $2000. The Company entered into a licence agreement with Schematic Electrical and Thyristors Pty Ltd on 25 September 2009 in respect of the fixed assets and the agreement gave the licensees the right to purchase assets. Schematic Electrical has continued to trade under the name “RANS Electrical”.
Mr Morgan was appointed liquidator on 11 December 2009 after the establishment of Schematic Electrical. By establishing Schematic Electrical prior to liquidation, transferring all employees of the company to Schematic Electrical and continuing to trade through Schematic Electrical using the name “RANS Electrical”, the Company avoided payment to unsecured creditors, including its statutory obligation to the Deputy Commissioner of Taxation. As noted, the Liquidator has reported this activity to ASIC.
Mr Morgan has also reported that the financial accounts contained many errors, balance sheets have understated assets, understated liabilities and employee entitlements are not properly recorded.
Mr Morgan has also stated the following in his report:
F.1 Debtors
The Company has outstanding book debts of $27,126 at the date of my appointment as Liquidator. The director’s estimated realisable value of these debtors was $11,026. I collected $16,262 from the Company’s book debts and wrote off the balance as uncollectable.
Further, my investigations revealed that Schematic invoiced and collected the proceeds of any work undertaken during the period October to December 2009 whilst the Company made payments for expenses and wages totalling approximately $146,986 in respect of the works completed.
Mr Sevior did not provide an adequate explanation in relation to the reasons for the Company paying theses expenses on behalf of Schematic.
Mr Sevior entered into a repayment arrangement paying $6,805 per month to satisfy my claims to the extent that he admits. I received $146,986 from Mr Sevior in full and final satisfaction of the claim.
Mr Morgan has deposed that Mr Sevior has accounted to the Company for many of these breaches through the following:
-the purchase of assets of the company for market value by Mr Sevior on behalf of Schematic Electrical;
-purchase of the company’s trading name “R.A.N.S.” by Mr Sevior on behalf of Schematic Electrical for market value;
-satisfaction of the balance owed to the secured creditor Bendigo and Adelaide Bank by Mr Sevior in the amount of $60,539;
-assignment of the priority creditors to Schematic Electrical in the amount of $104,684 ensuring a greater return to unsecured creditors;
-payment of other debts owed to the company in the amount of $37,779.46; and
-assignment of the lease liabilities to Schematic Electrical.
Although the matter is not free from difficulty, I have reached a different view to the learned Associate Justice. I am inclined to the view that although some aspects of the conduct of Mr Sevior and the Company are peculiar, unexplained, and indeed fail to measure up to the standard required, there is, given the present structure and circumstances, no risk to future creditors of the Company. Further, in my opinion and in the circumstances referred to, there is no real or sufficient risk that past breaches of duty by Mr Sevior and non-compliance of the kind exposed by the Liquidator will be repeated. Further, I take some comfort from the fact that ASIC, being aware of all the relevant facts, did not oppose the application.
So far as the alleged phoenix activity is concerned, it is relevant to note that assets acquired by Schematic Electrical were acquired at or about market value. I refer in particular to paragraphs 31 and 35 above. In the usual case, where there is a lack of commercial morality, assets are either simply transferred across or sold at nominal value or undervalue. I have not ignored the fact that steps had to be taken by the Liquidator to obtain value for the debtors and work in progress taken over by Schematic Electrical or that the Liquidator has reported Mr Sevior to ASIC for possible breaches of duty. However, I am entitled to look at the position as at the time of the application and in this regard I have noted the various steps taken by Mr Sevior and the proposed undertakings which I will refer to later.
It should also be stressed that Schematic Electrical took over all of the staff of the Company and the liabilities associated therewith, estimated at about $104,000, together with liabilities to lease creditors, estimated at about $424,000.
The failure to pay tax is, of course, a factor to be taken into account. However, the Company was obliged to cease trading and the tax debt was a debt amongst others owing and payable. These creditors will participate in the dividend arising out of the DOCA.
I am satisfied, based on a consideration of all of the evidence, that restoring the Company to the stewardship of Mr Sevior does not in the circumstances represent a risk to the public or creditors. In many of the cases where the termination of a winding up has been refused there have been persistent and usually serious breaches and issues of solvency. It is usually these matters of past conduct that have caused courts to conclude that so far as the future is concerned there is a risk to creditors and the public if the company continues to trade. This is not the case with the Company. There is no real risk to creditors. In particular the following matters are relevant and should be emphasised:
(a)Following the debt for equity swap the Company will become solvent.
(b)The Company does not propose to trade.
(c)There is no allegation that Mr Sevior has breached any duty in relation to the conduct of the winding up itself.
(d)There is no allegation of failure to lodge documents with ASIC or to file income tax returns and business activity statements.
(e)While Mr Sevior has frankly acknowledged some past failings, he has addressed these in a variety of ways:
(i)he has engaged a new accountant to assist him in the future running of the Company including implementing better management systems.
(ii)Mr Sevior has addressed the matters identified by the Liquidator/administrator by the purchase of the Company’s assets including its name for market value; and
(iii)creditors’ claims have been dealt with by a DOCA entered into in accordance with Part 5.3B of the Act.
(f)Neither ASIC nor any creditor has applied to set aside the DOCA.[7]
[7]Pursuant to s 445D of the Act or s 600A of the Act.
(g)Parliament contemplated that:
(i)a company in liquidation may execute a deed of company arrangement in accordance with Part 5.3B of the Act; and
(ii)a company that was subject to a DOCA entered into during the liquidation may apply to terminate the winding up.[8]
[8]See s 482(2A).
(h)The objects of Part 5.3A of the Act is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(i)maximises the chances of the Company, or as much as possible of its business, continuing in existence; or
(ii)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.[9]
(i)The DOCA itself represents a statutorily mandated resolution of the claims arising in the winding up of the Company.
(j)The administrator recommended that all creditors resolve to execute the DOCA and creditors resolved to execute the DOCA.
[9]See s 435A.
In all of the circumstances and in light of the proposed undertakings, I am of the opinion that it is proper to terminate the winding up of the Company in the manner proposed.
The appeal will be allowed and orders made accordingly.
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