FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Distinctive Enterprises Pty Ltd

(in liquidation) ACN 097 860 547 [2007] FCA 2074

CORPORATIONS – winding up – review of decision of registrar to refuse application for adjournment of winding up application under s 440A(2) of the Corporations Act 2001 (Cth).

Corporations Act 2001 (Cth), ss 440A(2), 286

DEPUTY COMMISSIONER OF TAXATION v DISTINCTIVE ENTERPRISES PTY LTD (IN LIQUIDATION) ACN 097 860 547

NSD2022 OF 2007

EMMETT J

19 NOVEMBER 2007

SYDNEY

THE COURT:

1.                  Orders that the orders made on 16 November 2007 be stayed up to 5 pm on 23 November 2007.

2.                  Grants leave for the defendant to be joined as an applicant for review, under s 35A of the Federal Court of Australia Act 1976 (Cth), of the orders made on 16 November 2007.

3.                  Orders that the hearing of the review application be adjourned to 2.15 pm on 23 November 2007.

4.                  Notes the undertaking of the applicants for review to provide to all creditors, as soon as practicable before the meeting convened for 23 November 2007, written submissions in a form approved by the plaintiff, through her legal advisers, as to why it is in the interests of creditors that the defendant be wound up.

5.                  Notes the undertaking of the administrator not to sign any deed of company arrangement prior to 5 pm on 23 November 2007.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 16 November 2007 a registrar of the Court made an order that the defendant, Distinctive Enterprises Pty Ltd (ACN 0976 860 547) (the Company), be wound up and that Mr David Kerr be appointed liquidator of the Company.  The registrar also made an order fixing the costs of the plaintiff, the Deputy Commissioner of Taxation (the Commissioner).  At the time of those orders, the Company was the subject of voluntary administration. 

2                     On 29 October 2007, Mr Mitchell Ball (the Administrator) was appointed as administrator pursuant to the Corporations Act 2001 (Cth) (the Act).  The Company opposed the winding up application on the ground that it had applied for an adjournment of the winding up application pursuant to s 440A(2) of the Act.  Under that provision, the Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is 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 registrar had evidence of a report by the Administrator to creditors, to be considered at a meeting of creditors to be held at 11 am on 23 November 2007. 

3                     After the orders were made, an application was made by notice of motion filed by the Administrator.  The Company, the Commissioner and the Administrator were joined as respondents.  Amongst other things, the notice of motion sought review of the decision of the registrar to refuse an application for an adjournment.  The notice of motion also sought orders that the registrar’s orders be set aside and that the proceeding be adjourned until 30 November 2007.  There is a question as to the competence of the motion including the standing of the Administrator in his own name to seek such orders.  Late on 16 November 2007, a judge of the Court granted leave for the motion to be filed and abridged the time for service on the basis that the motion would be returnable before the Corporations Duty Judge at 2.15 pm today, when the matter came before me.  There is some further evidence before me that was not before the registrar. 

4                     It is clear that an application for review involves a hearing de novo.  An application for review, in my view, may be made by the company that is the subject of a winding up order.  I consider that there is a residual power in the directors, or the administrator in a case such as this, to make such an application:  otherwise a right of review by way of a hearing de novo would be almost nugatory.  Counsel for the Commissioner has urged upon me the conclusion that the material that is to be put before the creditors, at the meeting on Friday, is inadequate.  In particular, the Commissioner points out that there is insufficient evidence of the source of funds that would be provided in the event that a Deed of Company Arrangement was approved by the creditors. 

5                     A director of the Company has put forward a proposal that the creditors approve a Deed of Company Arrangement which would generally involve the following:

(1)        A deed fund of $250,000 be established.

(2)        The deed fund would be provided by an initial payment of $50,000, followed by ten monthly instalments of $20,000.

(3)        The director of the Company, and related parties, will not claim for debts amounting to approximately $1.62 million.

(4)        The director will pay a Director Penalty Notice in the sum of approximately $160,000 issued by the Australian Taxation Office within one month.

(5)        The director will not claim as a creditor for the payment of the Director Penalty Notice.

6                     The Administrator estimated that, if such a Deed of Company Arrangement were approved, the unsecured creditors would receive approximately 13.73 cents in the dollar whilst if the Company is wound up, they will receive nothing.  The Administrator recommended that the creditors accept the proposed Deed of Company Arrangement.  No draft deed has been provided at this stage.  There is substantial dispute as to the indebtedness of the Company to the Commissioner. 

7                     The proposal also involves a guarantee being given, by the director of the Company, by his wife and by a related company, of the payment of the deed fund.  The Commissioner criticises the proposal on the basis that there is no reliable evidence as to the financial position of the director, his wife or the related company, to indicate that they would be in a position to meet any claim on any such guarantee. 

8                     Further, the Administrator in his report indicates that the books and records of the Company have not been kept in accordance with s 286 of the Act, in so far as they do not correctly record and explain all transactions and the financial position and performance of the Company and do not, at present, enable true and fair financial statements to be prepared and audited.  However, the Company’s accountant has indicated that material would be provided in time for appropriate accounts to be made available to the creditors at the meeting on Friday. The assets of the Company, at present, are less than $20,000, although the Administrator’s report indicates that, in the last 12 months, substantial assets of the Company were transferred to its director in exchange for a payment of $800,000, although the details of the payment are not explained. 

9                     On the material that is presently available, I would not 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.  However, if appropriate evidence were available to indicate that there is a realistic prospect that the proposed deed fund could be provided and that the financial position of the Company, as estimated by the Administrator is correct, then it could well be in the interests of the creditors for the Company to enter into a Deed of Company Arrangement. That is to say, 13 cents in the dollar would be better than nothing.  The Commissioner’s opposition is really based on the premise that there is no realistic possibility that the proposed fund would be made available. 

10                  Rather than lose the opportunity of the fund being made available by refusing any further adjournment of the application for review and by confirming, or making, a winding up order, I consider that it is presently appropriate that the director and the Administrator at least be given the opportunity of satisfying the creditors that there is a reasonable prospect of the deed fund being made available.  As I have said, there are technical difficulties with the proceeding as it stands.  I consider that the Company should be joined as an applicant for review.  I also consider that it would be appropriate to stay the orders made by the registrar last Friday up to 5 pm on 23 November 2007, and to adjourn the hearing of the application for review until 2.15 pm on that day, to enable the parties to report as to the result of the proposed meeting. 

11                  However, in the meantime, the Administrator must ensure that there is placed before the creditors any criticism or other submissions that the Commissioner wishes to make in opposition to the proposed Deed of Company Arrangement.  I propose to make orders to give effect to those propositions. 

Associate:

Dated:         11 January 2008