FEDERAL COURT OF AUSTRALIA

Lucas, in the matter of Queensland Maintenance Services Pty Ltd (in liq) (Receivers and Managers appointed) v Queensland Maintenance Services Pty Ltd (in liq) (Receivers and Managers appointed) [2012] FCA 1451

in the matter of queensland maintenance services pty ltd (in liquidation) (receivers and managers appointed) (acn 104 887 103)

THE COURT ORDERS THAT:

1.    Queensland Maintenance Services Pty Ltd be wound up in insolvency pursuant to s 459A of the Corporations Act 2001 (Cth) (the “Act”).

2.    Peter Anthony Lucas and Glenn Michael Shannon be appointed as joint and several liquidators.

3.    The applicant’s costs and expenses of the application be costs and expenses in the liquidation of Queensland Maintenance Services Pty Ltd.

4.    The liquidators appointed pursuant to Order 2 of these orders shall not be settle, abandon or otherwise resolve, without the approval of the Court, any appeal from the objection decision of the Commissioner of Taxation (or officers of the Commissioner) in relation to objections made by the company to Amended Assessments of income tax for the financial years ending 30 June 2007 and 30 June 2008 issued by the Commissioner or a Deputy Commissioner.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

in the matter of queensland maintenance services pty ltd (in liquidation) (receivers and managers appointed) (acn 104 887 103)

REASONS FOR JUDGMENT

The application

1    In these proceedings the applicants, Peter Anthony Lucas and Glenn Michael Shannon, who are the liquidators of Queensland Maintenance Services Pty Ltd (“QMS” or “the company”) seek an order that QMS be wound up in insolvency pursuant to s 459A of the Corporations Act 2001 (Cth) (the “Act”) and that they be appointed as joint and several liquidators of the company.

2    On 3 January 2012, the sole director of QMS, Mr Frank Gerard Zullo, resolved that the applicants be appointed joint and several administrators of the company pursuant to s 436A of the Act. The Minute of 3 January 2012 records that “Third party funding”, through Mr Zullo and entities associated with Mr Zullo, “to maintain the solvency of the company has been withdrawn effective today”. Mr Zullo also resolved that “in the opinion of the Directors [recognising that Mr Zullo is the sole director] voting for the resolution, the Company is likely to become insolvent at some future time”. Due to the contended complexity of the affairs of QMS, applications were made to the Court to twice extend the convening period for the second meeting of creditors. The second meeting occurred on 8 August 2012. At that meeting, the creditors resolved to wind up the company. On 14 August 2012, the secured creditor, Zullo Family Holdings Pty Ltd as trustee for the “Zullo Investments Trust”, appointed receivers and managers to the assets and undertaking of QMS. The liquidators of QMS now seek an order that the company be wound up in insolvency.

The statutory scheme

3    Before turning to the facts relevant to the present application in detail, it is convenient to set out aspects of the statutory scheme.

4    Section 435A of the Act records that the object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that, among other things, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

5    Section 436A provides that a company may, by writing, appoint an administrator if the Board has resolved to the effect that, in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time, and an administrator of the company ought to be appointed. The administration commences upon the appointment of the administrator under s 436A and ends on the happening of an event contemplated by s 435C(2) or (3) first occurring. The events contemplated by s 435C(2) include the execution of a Deed of Company Arrangement, a resolution of the creditors that the administration should end or a resolution of the creditors under s 439C(c) that the company be wound up.

6    One of the purposes (s 436E) of the first meeting of creditors in the course of an administration is the determination of whether a committee of creditors ought to be appointed and if so which creditors might constitute the membership of that committee. Section 436F provides for the functions of the committee of creditors.

7    While a company is under administration, the administrator has control of the company’s business, property and affairs; the administrator may carry on that business and manage the company’s property and affairs; the administrator may make dispositions of all or part of the business or property; and, the administrator may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration: s 437A(1). In doing so, the administrator acts as the company’s agent: s 437B.

8    When a company is under administration, a person (apart from the administrator) cannot perform or exercise a function or power as an officer of the company: s 437C(1).

9    By s 438A, the administrator must, as soon as practicable after the administration begins, investigate the company’s business, property, affairs and financial circumstances, and form an opinion about whether it would be in the interests of the company’s creditors for the company to execute a Deed of Company Arrangement; whether it would be in the creditors’ interests for the administration to end; or whether it would be in the creditors’ interests for the company to be wound up.

10    By s 438B, the directors must assist the administrator in the provision of relevant books of account and provide a statement about the company’s business, property, affairs and financial circumstances.

11    By s 439A(4), the notice to creditors convening the meeting contemplated by s 439A must be accompanied by a report by the administrator concerning the company’s business, property, affairs and financial circumstances and a statement setting out the administrator’s opinion about whether a Deed of Company Arrangement should be executed; whether the administration should end or whether it would be in the interests of creditors for the company to be wound up. The report must also set out the administrator’s reasons in relation to those options and such information known to the administrator as will enable the creditors to make an informed decision about each of those options.

12    Section 439C provides that at such a meeting, the creditors might resolve, among other things, that the company be wound up: s 439C(c).

13    Section 491 contemplates circumstances in which a company may be wound up voluntarily if the company so resolves by special resolution: s 491(1). Section 494 provides that where a voluntary winding up of a company is proposed, a majority of the directors may (at the time contemplated by s 494(1)) make a written declaration to the effect that they have made an enquiry into the affairs of the company and that (at a meeting) they have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the voluntary winding up.

14    Section 446A(1) provides that s 446A has application if the creditors of a company under administration resolve under s 439C(c) that the company be wound up.

15    By s 446A(2), the company is taken to have passed, at the time the creditors pass the resolution under s 439C(c), a special resolution under s 491 that the company be wound up voluntarily, and to have done so without a declaration having been made under s 494. So far as the winding up is concerned, s 497 is taken to have been complied with: s 446A(3).

16    Notwithstanding that a company is already being wound up voluntarily (by operation of s 439C(c), s 446A(2) and s 491, or otherwise), the Court may make an order under s 459A that an insolvent company be wound up in insolvency on the application of a party having standing under s 459P to seek such an order under s 459A: s 467B. Under s 459P(1)(e) a liquidator of a company may apply to the Court for an order that the company be wound up in insolvency.

17    For the purposes of an application under s 459P, the Court must presume by operation of s 459C(2)(c) that the company is insolvent if, during or after a period of three months ending on the day when the application is made, a receiver, or receiver and manager, of property of the company, was appointed under a power contained in an instrument relating to a relevant security interest in such property.

18    By s 95A(1) and s 2C of the Acts Interpretation Act 1901 (Cth), a company is solvent if, and only if, the company is able to pay all of the company’s debts, as and when they become due and payable. By s 95A(2), a company which is not solvent, is insolvent. By s 459D(1), in determining, for the purposes of an application under s 459P for an order that a company be wound up in insolvency, whether or not the company is insolvent, the Court may take into account a contingent or prospective liability of the company. Section 459D(1) does not limit the matters the Court may take into account in determining for a particular purpose whether or not a company is solvent: s 459D(2).

19    On the hearing of a winding up application, the Court may dismiss the application with or without costs, adjourn the hearing conditionally or unconditionally or make any interim or other order that the Court thinks fit: s 467(1). An order for winding up a company operates in favour of all creditors and contributories of the company as if it had been made on the joint application of all the creditors and contributories: s 471. The powers of the liquidator appointed on an order being made for the winding up of the company are contained in s 477 of the Act, and particularly s 477(1) and s 477(2). While a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company (s 471A(1)) although the prohibition does not operate in relation to a liquidator appointed for the purposes of winding up the company, an administrator, a person acting with the liquidator’s written approval or a person acting with the approval of the Court: s 471A(1A).

20    By s 477(2B), a liquidator of a company must not enter into an agreement on the company’s behalf (except with the approval of the Court or the approval of the committee of inspection or of a resolution of the creditors) if, either, the term of the agreement may end, or obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement is entered into (even if the term may end, or the obligations may be discharged within three months).

21    A liquidator appointed by the Court, may be removed by the Court, on cause being shown: s 473(1). In the course of a voluntary winding up the Court may remove a liquidator and appoint another liquidator on cause being shown: s 503.

22    Any disposition of property of the company (other than an exempt disposition), made after the commencement of the winding up by the Court is, unless the Court otherwise declares, void (s 468(1)) and any attachment, sequestration, distress or execution put in force against the property of the company after the commencement of the winding up by the Court is void (s 468(4)).

23    Section 513A provides that if the Court makes an order under s 459A that the company be wound up, the winding up is taken to have commenced on the day when the winding up of the company already in progress had commenced. The voluntary winding up, arising by operation of s 439C(c), s 446A(2) and s 491, is taken to have commenced, by operation of s 513B on the “… section 513C day in relation to the administration” and that day, by operation of s 513C(b) is the day on which the administration began. The administration began on 3 January 2012 and thus the voluntary winding up began on that day. On the making of a winding up order under s 459A, the winding up would commence by operation of s 513A(a) of Division 1A on 3 January 2012. Having regard to the definition of “relation-back day” in s 9 of the Act, that day in relation to a winding up of QMS, is the day on which the winding up (should an order under s 459A be made) is taken to have begun by operation of Division 1A of Part 5.6, namely, 3 January 2012.

24    Part 5.7B of the Act is concerned with the topic of “Recovering Property or Compensation for the Benefit of Creditors of an Insolvent Company”. Division 2 of Part 5.7B addresses the topic of “Voidable transactions” and s 588FJ addresses the topic of security interests created within six months before the relation-back day. Section 588FJ(1) provides that if a company creates a relevant security interest during the six months ending on the relation-back day, or after that day but on or before the day when the winding up begins, the security interest is void as against the company’s liquidator except as to the circumstances expressly provided for in s 588FJ(2): s 588FJ(1)(a) and (b).

25    One aspect of the present proceeding concerns the application of particular provisions of the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”) and the Taxation Administration Act 1953 (Cth) (the “Administration Act”). Section 177 of the 1936 Act provides that the production of a Notice of Assessment by the Commissioner shall be conclusive evidence of first, the due making of the assessment and, second, except in proceedings under Part IVC of the Administration Act on review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. Section 105-100 of Schedule 1 of the Administration Act provides that the production of a Notice of Assessment under Part 3-10 of the Administration Act or declarations made under relevant provisions of the GST Act (as defined) is conclusive evidence, first, that the assessment or declaration was properly made and, second, except in proceedings under Part IVC of the Administration Act, that the amounts and particulars in the assessment or declaration are correct. Part IVC of the Administration Act provides for the review of objection decisions of the Commissioner before either the Administrative Appeals Tribunal (the “Tribunal”) or the Federal Court of Australia. Section 14ZZM of the Administration Act provides that the fact that a review of an objection decision is pending before the Tribunal does not “… in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending”. Section 14ZZR contains a like provision in relation to appeals pending before the Federal Court.

The background matters

26    The applicants, as the present liquidators, contend that QMS is insolvent and ought to be wound up in insolvency in the interests of the whole of the creditors of the company. The applicants contend that they ought to be appointed by the Court as liquidators under the order as they have been the administrators since 3 January 2012 and liquidators pursuant to a resolution of the creditors since 8 August 2012. Much useful work, they say, has been invested in the administration of the company’s affairs in both capacities from 3 January 2012 until now.

27    The first respondent to the application is the company under the control of the receivers and managers. The receivers and managers are Mr Ian Currie and Mr Daniel Moore. The receivers and managers contend that the company is solvent and that the present application ought to be adjourned generally. The second respondent is the appointor of the receivers and managers, Zullo Family Holdings Pty Ltd as trustee for the Zullo Investments Trust. The receivers and managers, of course, stand possessed of the assets the subject of the charge, the secured assets. Mr Ian Currie has filed an affidavit deposing to a number of matters in support of a report under his name but presented on behalf of Mr Currie and Mr Moore which sets out the method of assessment of solvency preferred by the receivers. Mr Currie’s affidavit also responds to a number of the propositions or opinions expressed by Mr Lucas concerning his views about the solvency of QMS.

28    I propose to identify some of the matters addressed by Mr Lucas in the report of the administrators presented to the second creditors’ meeting and in doing so I will describe the present liquidators as, for that purpose, the administrators. I will then identify the basis upon which Mr Currie contends that QMS is solvent.

29    The background circumstances relating to the views expressed by the administrators are these.

30    QMS was incorporated on 20 May 2003. Its sole director is Mr Zullo and he is the company secretary. The shares in QMS are held by Zullo Family Holdings Pty Ltd and Gelding Pty Ltd. The company was engaged in the provision of services to the ABC Learning Centres entity (“ABC”), described as cleaning, regulatory and general maintenance services, gardening work and construction and fit-out services, around Australia. The entity conducting the undertaking of ABC Learning Centres went into receivership and administration in 2008. QMS continued to provide services to Goodstart Childcare Ltd (“Goodstart”) which acquired the childcare centres from ABC.

31    In the report to creditors prepared by the administrators dated 31 July 2012, the administrators describe aspects of QMS’s relationship with Goodstart. On appointment, the administrators continued the trading operations of QMS particularly with a view to fulfilling obligations under the contract with Goodstart. On 13 January 2012, the first meeting of creditors was held. On 17 January 2012, the arrangement between Goodstart and QMS for the provision of property maintenance services was terminated by Goodstart effective from 17 February 2012.

32    Colliers International was appointed as the new facilities management service provider. The administrators sought to discharge the immediate role of ensuring a high level of service to the childcare centres until the transition was effected.

33    Employment arrangements with the majority of the staff of QMS were terminated leading up to 17 February 2012. Several key administrative staff were retained to assist in dealing with ongoing issues.

34    The company ceased trading in February 2012, with the loss of the Goodstart contract.

35    At p 16 of the report to creditors the administrators observe that the gross trading profit for the years ending 30 June 2008, 2009, 2010 and 2011 was approximately $43.4m, $12.9m, $3.7m and $2.1m, respectively. The net profit/loss in those four years was approximately $10.9m (a loss of $5.09m), $1.6m (and a loss of $10.6m), respectively. At p 13, the administrators note that the unpaid employee entitlements constituted a total amount of $410,647.75 consisting of payments due to employees in respect of annual leave, redundancy, payments in lieu of notice and long service leave. The administrators also note at p 13 that they had received Proofs of Debt from unsecured creditors totalling $35,412,056.00 and the company’s records suggested a further amount in respect of unsecured creditors’ claims of $1,462,991.00 although those claims were not the subject of any formal Proofs of Debt. As at 31 July 2012, the administrators estimated total unsecured claims to be $36,875,047.00.

36    At p 14 of the report, the administrators explain the circumstances in relation to amended Notices of Assessment issued by the Commissioner to QMS arising out of a tax audit of the affairs of QMS. The administrators explain that on 1 June 2011 the Deputy Commissioner of Taxation (“ATO”) issued amended assessments to QMS for the financial years ending 30 June 2007 and 30 June 2008 in relation to QMS’s income tax liability. The amended assessments were in an amount of $28,666,176.00 which included a tax liability of $16,065,262.00, interest of $2,507,054.00 and the imposition of a penalty of $10,093,860.00. Prior to the appointment of the administrators, QMS had filed an objection to the assessment. At 31 July 2012, the administrators reported that the ATO was then reviewing the objection and no response had been received indicating a time within which a response might be forthcoming. The administrators expected a response by mid February 2012 and explained that the ATO had requested further documents from QMS.

37    The administrators said this:

The Company is not in possession of some of the documents requested by the ATO as they relate to dealings with the former ABC Learning Centres Ltd. We have requested assistance of the Liquidators of ZYX Learning Centres Ltd (in Liquidation) (Receivers and Managers Appointed) formerly ABC Learning Centres Ltd to provide the necessary documents. We are currently awaiting a response from the Liquidators. Given the volume of documents in the possession of the Liquidators, we anticipate obtaining the necessary documents will take some time.

We are attempting to exert some pressure on the ATO to consider the objections and provide a decision as soon as practicable, however in doing so we also want the opportunity to supply further material to ensure the Company puts forward its best possible case.

In the circumstances, we do not expect a response from the ATO in relation to the objection prior to the next creditors meeting.

38    Having explained those matters, the administrators then said this as to the prudence or otherwise of taking advice in relation to the amended assessments:

The Administrators thought it prudent not spending up to $100,000 in seeking Senior Counsel’s opinion in relation to the assessments until the ATO’s delegate has made their decision. Should the Company’s objection be rejected by the ATO, we would seek Senior Counsel’s advice on the prospects of the Company lodging an appeal on the assessment. We will advise creditors further, once we have received a response from the ATO.

39    As to the importance of the claim and its impact upon the administration, the administrators said this:

As discussed above, the ATO’s claim against the Company greatly impacts on the return to all unsecured creditors and the outcome is critical to the expected return to creditors.

We have intentionally selected solicitors that are very experienced in tax litigation and we note that they are commonly engaged by the Commissioner of Taxation in respect of disputes of this nature.

Our solicitors have obtained special clearance from the Commissioner of Taxation to act against the ATO in this matter.

40    At p 15 of the report, the administrators explain that after the ATO issued the amended assessments on 1 June 2011 (having regard to reasons published on 25 May 2011 for taking that course arising out of an audit), the ATO issued a garnishee notice to Goodstart requiring it to pay 20% of all invoice amounts issued by the company, to the ATO. The administrators sought judicial review in June 2011 of the decision to issue the garnishee notice. QMS failed in its application to set aside the garnishee notice. An appeal from that decision was heard by the Full Court of the Federal Court on 25 May 2012. As events transpired, the appeal was dismissed with costs on 2 November 2012. The funds paid to the ATO by Goodstart since June 2011 were, as at 31 July 2012, said to be $6,662,374.09.

41    At p 13 of the report, the administrators observe that if QMS is successful in its objections to the amended assessments, “the ATO’s debt could be cleared entirely which would greatly increase any return to the remaining unsecured creditors of the Company” [emphasis added].

42    On 24 October 2011, QMS granted a fixed and floating charge over all of its assets to a related entity, Zullo Family Holdings Pty Ltd as trustee for the Zullo Investment Trust (the “trustee”). The administrators in their report said that they understood advances made by trustee to QMS after the creation of the charge amounted to $2,205,000.00 and the advance remained outstanding at the date of appointment of the administrators on 3 January 2012. At p 12 of the report, the administrators said that they had sought legal advice regarding the validity of the charge and whether the charge might be declared voidable as against a liquidator in the event of a winding up; the value of the security; and whether payments made under it might constitute a preference.

43    The administrators also said this:

On the legal advice received, it is likely this charge is voidable if the Company were wound up in insolvency. The Liquidators would be required to make an application to Court to have the Company wound up in insolvency, whereupon the charge would become void under section 588FJ of the Corporations Act 2001. Although the prospects of obtaining such an order appear reasonable, such an order is at the discretion of the Court.

44    The Deed of “Specific and Floating Charge” dated 24 October 2011 granted by QMS in favour of the trustee is exhibited to the affidavit of Mr Lucas sworn 14 September 2012. The deed is executed by Mr Zullo as the sole director of QMS and the sole director of the trustee. The “Charged Property” means all the present and future assets of QMS; all the “legal interest” of QMS in any of those assets at any time; and, six categories of assets set out in the definition.

45    At pp 9 and 10 of the report, the administrators set out their understanding of the facts in relation to a loan made to Mr Edmond (Eddy) Groves. The loan to Mr Groves is in an amount of $8,195,637.00 and the circumstances described by the administrators in their report are these.

46    The loan concerns a number of advances made to Mr Groves by Mr Zullo. The monies were advanced by QMS to Mr Zullo on his loan account and then advanced by Mr Zullo to Mr Groves.

47    Mr Zullo in an affidavit sworn 16 November 2012 in proceedings in the Supreme Court of South Australia as between Mr Zullo and QMS (Receivers and Managers Appointed) (In Liquidation) as first and second plaintiffs and Mr Groves as defendant said this about the loan. As a result of conversations leading up to 14 March 2008 between Mr Zullo and Mr Groves, Mr Zullo agreed to lend $8m to Mr Groves for 60 days at an interest rate of 9% secured by Mr Groves’s granting a mortgage to Mr Zullo over Mr Groves’s shares in a company called Austock Limited. Mr Zullo advanced the monies on 14 March 2008 and received, on 18 March 2008, an email from Mr Groves confirmatory of the arrangement. A mortgage of the Austock shares was executed on 9 April 2008.

48    Mr Groves failed to repay the loan within 60 days as required by the terms of the loan; failed to repay the monies within six months under the terms of the Austock mortgage; and failed to repay the loan at all but for other arrangements mentioned shortly.

49    As a result of the failure to repay the monies, Mr Zullo transferred the Austock shares to himself under the terms of the mortgage on 18 August 2009. As Mr Groves by May 2009 had been unable to repay the outstanding loan, Mr Groves agreed to transfer a property at Currumbin to the value of $2.7m to Mr Zullo. That occurred on 1 June 2009. The value of the property and the value of the Austock shares ($1.5m) was deducted from the loan amount.

50    Other transactions took place as between Mr Zullo and Mr Groves. The first concerned QMS carrying out refurbishment work at Mr Groves’s property called “Adelaide Dome” and the second concerned rectification work at Mr Groves’s “GolfWorks Store” in Woolloongabba. Arrangements in relation to these two transactions were made in March 2007 and September 2007 respectively. Mr Zullo says that Mr Groves agreed to provide second mortgage security for the amounts payable to QMS in respect of the work on the two properties, over the Adelaide Dome property. The total value of the work was $1,750,000.00.

51    Mr Zullo says in his affidavit that no part of the amount owing under the mortgage has been paid. On 7 October 2009, the solicitors for Mr Zullo wrote to Mr Groves advising that the outstanding balance including interest on the two loans (and taking account of the deductions in respect of the share transfer and the transfer of the Currumbin property) was $6,984,716.38 as at 7 October 2009. Mr Zullo also says that during the months of September and October he had a number of conversations with Mr Groves regarding payment of his outstanding loans. Mr Zullo says that despite those discussions, “the loans were not repaid”.

52    Mr Zullo says that on 26 November 2009 he made demand upon Mr Groves for payment of the outstanding loan monies. The non-payment resulted in the commencement of Supreme Court proceedings in South Australia (481 of 2010).

53    Mr Zullo also says in his affidavit that on 23 June 2011 he assigned all of his right, title and interest in the debts owing to him by Mr Groves, and the security interest under the Adelaide Dome second mortgage, to QMS. That instrument dated 23 June 2011 is described as a “Deed of Assignment of Debt and Mortgage”. The deed is signed by Mr Zullo in his own right and by him as the sole director and secretary of QMS. The deed recites that Mr Zullo has agreed to assign his entire interest in the debt and the second mortgage to QMS absolutely. By clause 3.1, QMS must pay the “Purchase Price” to Mr Zullo upon execution by QMS of the deed. The Purchase Price is defined to mean $8,195,637.39, that is to say, the full value of the debt.

54    In the report of 31 July 2012, the administrators observe that the Zullo mortgage assigned to QMS is a second ranking mortgage, ranking behind a mortgage in favour of the Commonwealth Bank of Australia (“CBA”). The first ranking CBA mortgage secures a debt of approximately $8m and the value of the Adelaide Dome is said to be approximately $2m. The administrators said in their report that they were collating documents, reviewing the relevant files with QMS’s solicitors and seeking advice about the best way of trying to recover the debt. The administrators said that it would be necessary to pursue Mr Groves personally and they could not say whether the entire debt would be recoverable from Mr Groves as they did not have “sufficient information on the financial position of Mr Groves and his ability to repay this debt”. The administrators said that in the event of a winding up order, it would be the intention of the administrators as liquidators, if appointed, to seek information about the transaction by publicly examining Mr Groves.

55    There is however a more fundamental dimension to the matter as contended for by the liquidators.

56    The liquidators say that the chronology is important. On 25 May 2011, the ATO published “Reasons for Decision” in relation to a tax audit of QMS’s taxation affairs foreshadowing the issuing of amended assessments. On 1 June 2011, the Deputy Commissioner issued the amended assessments arising out of the audit in an amount of $28.6m. In June 2011, after the issue of those assessments, the trustee owed QMS as at 23 June 2011 $2,672,982.00. On that date, Mr Zullo assigned debts owed to him personally by Mr Groves of $8,195,637.00 to QMS. That debt had been unrecoverable throughout 2008, 2009, 2010 and as at 23 June 2011. After the assignment of the Groves debt at full value to QMS and a restructure of the loan accounts, QMS went from being a net creditor of the trustee in an amount of approximately $2.6m to a net debtor to the trustee in an amount of $5,522,655.00. The Deed of Assignment of the Groves debt refers to an agreement between QMS (whose only director is Mr Zullo) and Mr Zullo for the assignment, which in a practical sense is an agreement Mr Zullo struck with himself. The circumstances giving rise to the assignment of the debt and related matters are not explained in any of the material.

57    Moreover, on 24 October 2011, after the issue of the ATO amended assessments, the implementation of the assignment of the Groves debt and the loan account restructure, QMS granted the specific and floating charge previously mentioned in favour of the trustee in the circumstances previously described.

58    The liquidators say that after the grant of the charge to the trustee QMS paid $2,074,173.00 to the trustee; QMS paid $2,449,114.00 to entities related to the trustee and the trustee paid $2,205,000.00 to QMS. The liquidators say that all monies QMS received from the trustee after the grant of the charge were applied to discharge previously unsecured debts owed to the trustee or to entities related to the trustee.

59    In these circumstances, the administrators had formed an opinion based on legal advice (and expressed it to the creditors in their report as earlier mentioned) that the grant of the charge would be likely to be void under s 588FJ of the Act.

60    The point of these observations in relation to the charge for present purposes is not to embark upon a consideration of the merits of whether the charge is void by operation of s 588FJ of the Act. That matter is not alive in these proceedings. The only relevance of the circumstances relating to the charge so far as these proceedings are concerned is that on the basis of the analysis of the transactions and the legal advice obtained by the administrators, the administrators had formed an opinion that should the company be wound up in insolvency, the charge would be likely to be found void, and that matter was relevant at least in two respects. First, it was a matter which was put before the creditors for their consideration at the meeting and second, it is a matter which goes to where the best interests of the creditors as a group might lie in the exercise of the discretion as to whether an order ought to be made that the company be wound up in insolvency. The creditors resolved at the meeting that the company be wound up. The liquidators continue to hold the view concerning the charge that they held in their capacity as administrators and they continue to assert that there is a serious question to be determined as to the validity of the fixed and floating charge granted by QMS to the related entity of Zullo Family Holdings Pty Ltd in its capacity as trustee of the Zullo Investment Trust.

61    In his affidavit filed 28 September 2012, Mr Lucas, at para 9, expresses the view that the company was insolvent as at 18 September 2012 and remained insolvent at the swearing of the affidavit. Mr Lucas re-asserted his previous opinion that the company was, in his view, insolvent from the date of issue of the amended assessments by the Commissioner of Taxation in June 2011 (recognising that the amended assessments issued on 1 June 2011) and that the company has remained insolvent from that time up to and including the date of filing of the winding up application on 14 September 2012 and, according to his most recent affidavit, filed 5 December 2012, Mr Lucas asserts that QMS is presently insolvent.

62    The liquidators say that the company is insolvent because it cannot pay its debts as and when they fall due.

63    First, the tax debt due to the Commonwealth by reason of the issue of the amended assessments is due and payable and notwithstanding that an application might be filed before the Tribunal or the Federal Court by way of an appeal from the objection decision, the debt remains due and payable by operation of the Administration Act. The filing of an appeal from the Commissioner’s objection decision does not render the tax debt anything other than due and payable. The application for an order under s 459A of the Corporations Act is not a Part IVA proceeding under the Administration Act. However, the liquidators acknowledge that should an appeal from the Commissioner’s objection decision be filed, the present material suggests that there is at least an arguable basis for that appeal. I propose to take that matter into account in the exercise of the discretion as to whether a winding up order ought to be made. For present purposes, the immediate question is whether QMS is insolvent. On that question, it remains the position that the issue of the assessments gave rise to a debt due to the Commonwealth which is a debt presently due.

64    Second, quite apart from any debts due to related parties, QMS has present liabilities to former employees in respect of annual leave, redundancy, payment in lieu of notice and long service leave which have not been paid.

65    Third, QMS has present liabilities to trade creditors which have not been paid. Mr Currie in his report filed on behalf of the receivers puts the amount of those trade creditor claims (excluding related party claims) at $3,425,543.00.

66    Fourth, QMS has a liability to the Commissioner in respect of GST obligations on QMS’s running account for the purposes of the Administration Act which is not disputed and is due and payable ($92,280.00).

67    Fifth, related parties claim substantial debts due to them. Although in the context of the earlier Deed of Company Arrangement and in the further context of propositions put by Mr Currie concerning his view about the method of determining solvency which in part involves a proposition that the related parties in certain circumstances would not press their claims, it nevertheless remains the position that the related party claims are presently due and unpaid.

68    Sixth, on 14 September 2012, the liquidators filed the present application. On 14 August 2012, the secured creditor appointed receivers and managers to the assets and undertaking of QMS. That appointment occurred during a period of three months prior to 14 September 2012 with the result that by operation of s 459C(2)(c), for the purposes of an application under s 459P, the Court must presume that the company is insolvent.

69    It seems to me, having regard to all of these considerations and all of the material filed in support of the application on this topic, comprising the affidavits of Mr Lucas filed 14 September 2012, 28 September 2012 and 5 December 2012, that QMS is plainly insolvent as it cannot pay its debts as and when they fall due.

70    The receivers seek to rebut the presumption and affirmatively demonstrate solvency on the basis of a report filed by Mr Currie dated 23 November 2012. The final version of that report is exhibited to Mr Currie’s affidavit sworn 10 December 2012. In the report, Mr Currie observes that he and Mr Daniel Moore were appointed receivers and managers on 14 August 2012. He observes that in his view based on information available to him and “subject to the objection to the ATO assessment notice being successful … and the unsecured related entities deferring their claim … it appears the Company is currently solvent as it is able to pay its debts as and when they fall due” [emphasis added]. The company, of course, ceased trading in February 2012 upon the loss of the Goodstart contract. The company then found itself in a position where it could not pay the claims of particular employees and could not pay other trade creditors among the other obligations already described. Debts have fallen due which have not been paid and cannot be paid. It is difficult to accept the proposition that the company, upon the contingencies Mr Currie identifies is currently solvent as it is able to pay its debts as and when they fall due. The simple fact is that a substantial body of debts have fallen due and they have not been paid and the company is unable to pay them. Mr Currie’s proposition, of course, is predicated upon a successful appeal from the ATO’s objection decision and unsecured related entities deferring their claims. The notion that QMS is currently solvent based on the first of those contingencies is nothing more than saying that if and when an appeal from the objection decision is successful monies will then become available and debts presently unpaid will be able to be paid, which in turn, is dependent upon the related entities deferring their claims.

71    Mr Currie says that in determining the solvency of a company, insolvency practitioners “should primarily rely on an analysis based on a Cash Flow test”. Mr Currie says that because the company ceased trading in February 2012 and there are no active cash flows, it is more appropriate that solvency be determined by reference to a Balance Sheet analysis. In the course of his report, Mr Currie develops a balance sheet for the company as at 23 November 2012. In that Balance Sheet, Mr Currie identifies the current and fixed assets and particularly addresses questions relating to the contingent assets and the current liabilities of the company. As to the contingent assets, Mr Currie includes his assessment of the recoverable value of the debt owed by Mr Groves to QMS in an amount of $3,525,396.00. He also includes the recovery of the monies paid to the ATO under the garnishee of $6,662,374.00 and interest related to the ATO garnishee order up to 13 December 2012 of $351,344.00. Another contingent asset is said to be the administrators and liquidators’ remuneration at $227,184.00 which is said to reflect the recoverable over-assessment of remuneration by the administrators and liquidators.

72    As to the current liabilities, Mr Currie recognises unpaid entitlements due to employees in respect of four categories of entitlements which constitute in all $410,648.00. Mr Currie also recognises, as earlier mentioned, debts due to trade creditors excluding related parties of $3,425,543.00. The contingent liabilities include a provision for unclaimed creditor claims of $1,352,828.00.

73    As to some of these matters, Mr Currie says this.

74    In relation to the debt payable by Mr Groves, Mr Currie recites his understanding of aspects of the affidavit of Mr Zullo sworn in connection with the South Australian Supreme Court proceedings concerning the history of the transactions. Mr Currie notes that the administrators had taken a view that the estimated recoverable value lies between, at the upper end, an unknown amount and at the lower end, nil. Mr Currie then says that “based on my calculation I anticipate a maximum recovery of $7,050,792.00, subject to Mr Groves ability to repay the loan” [emphasis added]. Mr Currie also says that he has “insufficient information available at this time” and that he is “unable to determine Mr Groves ability to repay the loan”. There is no analytical foundation in Mr Currie’s report as to the basis upon which he could have reached a view that the recoverable value of the Groves debt is 50% of the maximum amount, resulting in an appropriate balance sheet contingent asset of $3,525,396.00. Mr Currie says that he has insufficient information and cannot determine Mr Groves’s ability to repay the loan. A full and careful reading of Mr Zullo’s affidavit of 16 November 2012 makes it plain that apart from the forced realisation of the share mortgage and the transfer of the Currumbin property, Mr Zullo has not been able to secure repayment of any part of the loan at all throughout 2008, 2009, 2010, 2011 and 2012. An obvious question arises as to the basis upon which a sound prudent assessment could be made that QMS might include within its balance sheet as a contingent asset of the company, the Groves debt at an amount of $3,525,396.00.

75    Mr Currie also says that should the debt not be recoverable, the company nevertheless remains solvent provided that the appeal from the Commissioner’s objection decision is successful and the unsecured related entities defer their claims.

76    Mr Currie at para 7.7 examines aspects of the contingent assets relating to payments to the ATO under the garnishee of $6,662,374.00. It seems to be common ground for the purposes of these proceedings and thus a potential winding up of the company in insolvency, at least as put by the receivers, that in the event that any appeal from the Commissioner’s objection decision is successful, with the result that approximately $6.6m paid under the garnishee in part satisfaction of that tax liability is repaid to the company, those monies fall to be available to the unsecured creditors (and the related party claimants will make no claim). It necessarily follows that neither the receiver nor the secured creditor would make any claim, or otherwise assert, that any monies paid by the Commissioner to the company arising out of a successful appeal would be said to be subject to the charge and first paid in discharge of the debt secured by the charge.

77    Mr Currie also notes that in the period 3 January 2012 to 7 August 2012 the administrators were paid $454,367.10 and that the liquidators have claimed a lien over a further amount of $321,626.74 in remuneration for their appointment as administrators and liquidators up to and including 14 August 2012 resulting in total remuneration claims of $775,993.84. Mr Currie says that documentation supporting the remuneration has been sought from the administrators and liquidators. Although Mr Currie has not seen supporting documentation, Mr Currie says that based on his professional experience, the amount claimed “would appear” to be excessive for the work carried out. Thus, Mr Currie has applied a discount of 50% which would result in an amount of $227,184.00 being available to the company.

78    According to Mr Currie’s Balance Sheet analysis, QMS has a surplus of assets over liabilities of $2,256,571 having regard to the notes or commentary on each of the items comprising the postulated Balance Sheet. Mr Lucas contends that QMS is insolvent for the reasons already identified.

79    I have examined each of the items discussed by Mr Currie in formulating his view of the matter and I have considered the material set out in Mr Currie’s affidavits. Ultimately he concludes that provided the appeal from the Commissioner’s objection decision is successful and the garnishee payments are repaid to the company, and unsecured related entities defer their claims, the company “will be solvent”. I accept the evidence of Mr Lucas. I take the view that the solvency of QMS is to be determined on the footing of a cash flow analysis by asking whether the company can pay its presently due and payable liabilities and if not, when did that circumstance arise. It was the position at least at 14 September 2012 and is the position today that QMS was and is insolvent.

80    I reject Mr Currie’s assessment of solvency.

81    In the end result, his conclusion is that the company “will be” solvent upon certain contingencies occurring. Mr Currie recognises that the primary basis for determining solvency is a cash flow analysis and notwithstanding that there may be a legitimately arguable question in any appeal from the Commissioner’s objection decision (and related creditors will defer their claims should and only should any appeal be successful), the fact remains that there is a GST debt to the Commissioner in any event; trade creditors have not been paid; employee entitlements have not been discharged; and, the balance sheet analysis simply postulates a future solvency should certain events fall in. Mr Currie’s report does not make it plain that all of the claims (leaving aside related creditors) will necessarily be able to be paid in full.

82    In any event, the company is presently insolvent. The creditors have resolved that the company be wound up.

83    Moreover, the circumstances in relation to the granting of the charge give rise to a legitimate basis for concern as both as to the granting of the charge and the “re-structure” of the accounts and resultant payments. The administrators are required under the Act to form a view about such matters. They continue to hold the views they previously expressed. It is sufficient to observe that there is a proper basis for concern, and the circumstances surrounding the transaction and the things flowing from the transaction, ought to be investigated by liquidators appointed consequent upon an order that the company be wound up in insolvency.

The real question in issue

84    The real question in these proceedings is whether the present liquidators ought to be appointed as the liquidators of the company under an order for the winding up of the company in insolvency or whether other liquidators ought to be appointed.

85    The present liquidators say that they are familiar with the transactions of the company and a significant investment has been made in them in undertaking a substantial field of work. They say that the interests of the creditors are served by appointing them in a continuing role.

86    The receivers, and the secured creditor appearing independently of the receivers, assert that the liquidators have demonstrated partiality in favour of the ATO and that they cannot bring an independent mind to bear upon all of the necessary decisions to be made in advancing the interests of the creditors. In particular, the first and second respondents say that the present liquidators have shown, by conduct, a disposition not to pursue the merits of the objection to the amended assessments and not to prosecute an appeal from the objection decision. The receivers and managers say that an examination of the actions of the administrators from 3 January 2012 and then as liquidators from August 2012, shows that the individuals failed to agitate the merits of the position in relation to the objections. Moreover, the receivers say that the administrators could have taken steps under s 14ZYA of the Administration Act to force the hand of the Commissioner to make a decision in relation to the objections, but failed to do so. The receivers say that the administrators failed to take legal advice about the merits of the objections and exhibited a disinterest in pursuing the objections. Moreover, the receivers say that the correspondence demonstrates that the receivers encouraged the ATO to put off (for 30 days) making a decision on the objections, when the ATO ought to have been pressed to urgently decide the objection questions favourably to QMS.

87    The receivers and managers also make a point related to “emphasis” and say that initially the administrators regarded the ATO claim as the principal matter to be addressed in the administration and a matter, put simply, upon which the resolution of the interests of the creditors would turn. However, now, in the context of the present application, lesser emphasis is given to the role of the ATO claim in determining where the interests of the creditors lie.

88    The receivers and managers also contend, and the secured creditor itself contends, that because the liquidator has entered into a “funding” agreement with the ATO by which the ATO has funded the making of the present winding up application, the liquidators have put themselves in a conflict of interest or in a position in which a legitimate apprehension arises of partiality in favour of the ATO because, on the one hand, they ought to have been vigorously and independently pursuing objections to the amended assessments and, by way of litigation, an appeal from the Commissioner’s objection decisions, and on the other hand, they have entered into an agreement or arrangement with the ATO to fund the present application with a view to “getting rid of” the receivers. The receivers say that it is enough to prevent the present liquidators from being appointed that they have entered into a funding agreement with a party, against whom, they must necessarily take proceedings to protect the interests of all of the creditors.

89    As to the last matter, it is not uncommon for the liquidators of a company to be funded by the creditors or, more particularly, a resourced major creditor for the purpose of enabling the liquidators to forensically examine a question, take legal advice or pursue applications to the Court. In undertaking any of these steps, the liquidators must make informed independent judgments about the merits of the matters in issue. The creditors, or a major creditor, may provide an undertaking as to costs or put the liquidators in funds but the professional judgments about the matters arising in the administration are ones to be made by the persons charged with the administration of the affairs of the company. The matter becomes a little more complicated when the creditor providing the funding is a party who has an interest that may be adverse to the interests of the creditors as a whole and who would seek to resist a proceeding to be brought by the liquidators (for the benefit of all creditors) against the funding creditor that goes to the validity of the creditor’s claim. The position in these proceedings is that the Commissioner has issued amended assessments; objections were lodged prior to the appointment of the administrators; the administrators (and subsequently the liquidators) have maintained those objections; an objection decision was made on 4 December 2012; and, an appeal is very likely to be filed (subject to proper advice and the relevant decisions being made) in the relevant forum.

90    The evidence of Mr Lucas is that the ATO has not sought to influence the liquidators in any way concerning any issue the liquidators maintain or may wish to maintain in relation to the position QMS has adopted in objecting to the amended assessments or in seeking to appeal from the objection decision. There is a well understood transparent procedure that does not need to be set out in detail in these reasons that governs the formulation of issues between the ATO and the taxpayer in any appeal, and related case management procedures, that are applied in making any appeal in either forum ready for hearing. All of these orthodox procedures govern the matters in controversy between the ATO and the taxpayer in any Part IVC proceeding.

91    The uncontested fact that the Commissioner, as the major creditor of the company, is providing funding to the liquidators in making this application, does not, of itself, provide a basis for a legitimate apprehension that the Commissioner will seek to influence the liquidators to set aside the orthodoxy of the appeal processes, or abandon an arguably good appeal, or otherwise seek to influence the liquidators to do anything other than properly discharge their duties specifically in relation to issues as between the ATO and the company in the prosecution of any Part IVC proceeding that is commenced. The ATO will, of course, within the Part IVC proceeding takes a position that, no doubt, supports the objection decision and resists the contentions of the company as the taxpayer. The particular questions in issue in the proceeding will then be determined by either the Tribunal or the Federal Court.

92    Apart from the fact itself of the funding arrangement made, it is said, in the context of contentions to be agitated by the liquidators against the ATO in a Part IVC appeal, the receivers and managers (and the secured creditor) contend that they hold a legitimate apprehension of partiality in favour of the ATO as the administrators (and later in their capacity as liquidators), have failed to pursue the merits of the objections (and “did nothing,” it is said, in any real or practical sense).

93    It is therefore necessary to examine the sequence of exchanges between the administrators/liquidators and the ATO and other parties in relation to these matters. The administrators rely upon the affidavit of Ms Fatima Deen sworn 4 December 2012. Ms Deen is an employee of P.A. Lucas & Co, chartered accountants. Ms Deen has been involved in the day to day conduct of the administration on behalf of Mr Lucas and Mr Shannon in their successive capacities. The receivers and managers have contended in correspondence from their solicitors to the administrators that nothing has been done since April 2012. The administrators dispute that proposition.

94    The sequence of exchanges are these based on the affidavit of Ms Deen.

95    On 27 February 2012 the administrators wrote to Mr Cunningham at the ATO referring to Ms Deen’s earlier telephone conversation of 22 February 2012, concerning objections lodged by QMS in respect of amended Income Tax Assessments for the financial years ending 30 June 2007 and 30 June 2008. The objections were lodged prior to the appointment of the administrators. In the 27 February 2012 letter the administrators confirmed to the ATO that “we are maintaining the company’s objections”. The administrators said that they would like to discuss the objections further with the ATO “following on from your comments to Ms Deen”.

96    On 7 March 2012 Ms Deen sent an email to Mr Cunningham (referring to voicemail messages left for him by Ms Deen) saying that the administrators would like to organise a meeting with him for Monday 12 March 2012 and asking whether such a meeting would be convenient for Mr Cunningham.

97    On 14 March 2012 Ms Deen sent an email to Mr Cunningham referring to the earlier email (and another voicemail message left for Mr Cunningham), asking Mr Cunningham to please call to discuss whether the administrators could meet with representatives of the ATO in respect of the company’s objections to the assessments.

98    On 14 March 2012 Ms Deen made another telephone call to Mr Cunningham. He was unavailable. Ms Deen left a voicemail message for him requesting him to return her call.

99    On 26 March 2012 Ms Deen made a telephone call to Mr Glenn Caligaris. Mr Caligaris was unavailable and Ms Deen left a voicemail message for him. On the same day Ms Deen made a telephone call to Mr Paul Whimp. Mr Whimp is an accountant at Harris Black, the accountants for QMS. Ms Deen was told that Mr Whimp was on annual leave until 30 March 2012 and would be back in the office on Monday 2 April 2012. Ms Deen spoke with Mr Whimp’s personal assistant and provisional arrangements were made for a meeting on either Tuesday 3 April 2012 at 12 pm or on Monday at 2 pm.

100    On 28 March 2012 Ms Deen sent another email to Mr Cunningham at the ATO saying that she had left another voicemail for him. In the email Ms Deen asks Mr Cunningham to “please make contact with our office as soon as possible in respect of the above matter? Or at least refer us to the supervisor handling the objections lodged by the company”. Ms Deen’s diary notes also confirm the placing of the call to and the leaving of a voicemail message with Mr Cunningham.

101    On 29 March 2012 the administrators wrote to Mr Whimp (sent by email) referring to a letter of 29 February 2012. The administrators told Mr Whimp that they were investigating various aspects of the company’s financial affairs and said that they were “continuing with the company’s litigation in respect of matters with the Australian Taxation Office, including the imposition of a Garnishee Order and the company’s objections to the Amended Tax Assessment Notices issued by the Deputy Commissioner for Taxation”. The administrators said that, in this regard, “we request you provide all documents you have submitted on behalf of the company in support of the objection [to the Amended Assessments]. The administrators said: “Once you have collated this documentation, we would like to meet with you to collect and discuss same and tentatively would like to do so at a convenient time in the week of 2 April 2012. Please contact our office as soon as practicable to arrange this meeting”. The administrators encouraged Mr Whimp to contact Ms Deen should he have any questions to ask.

102    On 10 April 2012 Ms Deen placed another call to Mr Cunningham at the ATO. He was unavailable. Ms Deen left another voicemail for him requesting him to call back. On the same day Mr Cunningham returned the call. He had been on personal leave and had returned to the office. He told Ms Deen that the team leader concerning the objections was Patricia Redknep (relevant numbers were given). A discussion took place about Mr Cunningham putting an information request to the administrators; whether an FOI application would be necessary from the administrators concerning particular documents; when the information letter would be likely to be received; and the state of the ATO’s analysis of the objections.

103    On 20 April 2012 the ATO sent the administrators the information letter Mr Cunningham had been speaking about. The letter asks the administrators to provide additional information “so we can make a decision on the grounds” set out in the objections. The information was requested by 18 May 2012 and was directed to two topics.

104    The first dealt with renovation compensation expenses for the 2007 income year. The ATO observed that in the objection lodged by Mr Whimp, an observation is made that QMS does not have copies of (or access to the ABC Group intranet which records entries for issuing invoices) invoices for renovation compensation amounts in relation to a particular child-minding centre. The objection observed that QMS was in the process of obtaining that information. The ATO requested the administrators to “provide evidence to substantiate the amount of each invoice regarding the renovation compensation fees such as details of the basis for calculation of the fee and the agreement breached”.

105    The second topic concerned management fee expenses for the 2008 income year. The ATO asked the administrators to provide invoices issued by the ABC Group for the management fees to Neighbourhood Early Learning Centres Pty Ltd (“NELC”) for the 2008 income year; monthly revenue figures for the child care centres between the period 1 July 2007 to 31 December 2007; and bank statements evidencing any payments made for the 2008 income year.

106    The ATO letter also made some observations about FOI requests.

107    On 23 April 2012 the ATO letter was referred to Ms Deen. On 23 April 2012 Mr Whimp sent an email to Ms Deen and others responding to the letter from the administrators of 28 March 2012. In his email, Mr Whimp said: “… please find attached the Objections as lodged with the ATO on 2 December 2012”. Mr Whimp also said that in relation to the ATO requests for further information, QMS had said in its objections at paras 39 and 40 that “the taxpayer would seek to get this information” and that as to the 2008 year, Mr Whimp was “looking to see if this information was provided during the audit process”.

108    On 16 May 2012 Ms Deen sent an email to Mr Whimp and others following up an earlier conversation with a person called James [McGaw] and asked Mr Whimp whether he had “been able to put together the further documents requested by the ATO”. Mr Whimp had said, by his email of 23 April, that he was examining the question of whether the 2008 information sought by the ATO had been provided during the audit. He had also recognised that QMS had taken the position as to 2007 that the taxpayer would seek to get that information. In her email of 16 May Ms Deen asked Mr Whimp whether she ought to seek an extension of time from the ATO and if so, how long would it take [Mr Whimp] to gather the information.

109    On 21 May 2012 Ms Deen made a telephone call to Mr Whimp. He was then in a meeting. Mr James McGaw said that he would speak with Mr Whimp and he would return the call to Ms Deen. On 21 May 2012 Ms Deen received a message on her voicemail from Mr Whimp to the effect that there was “nothing that answers part 2” and that the company “may have some docs with Martin Gallagher”. Ms Deen had a telephone call with Mr Paul Whimp that day in which it was thought by Mr Whimp that invoices should exist; they could be provided electronically; Mr Whimp would speak to Martin Gallagher; Mr Whimp would call Ms Deen again the following afternoon. There was also some discussion of a sub-contractor’s charge in relation to matters concerning Goodstart.

110    On 22 May 2012 Mr Whimp sent an email to Ms Belinda Atkinson (copied to Mr Gallagher and Mr McGaw) concerning the ATO request for information. Mr Whimp observed that he had spoken with Ms Deen and Mr Gallagher. Mr Whimp set out the information sought by the ATO by reference to the two items earlier discussed. Mr Whimp observes that as to the renovation compensation expense item, the calculations and source information was held by ABC who had issued the invoices and therefore QMS did not have any information other than the invoices it received. As to the management fee expenses for the 2008 income year, Mr Whimp said that Mr Gallagher was going to provide those documents; as to the monthly revenue figures, because the transfer of the Centres to NELC did not occur until December 2007, the actual accounts “and therefore revenue numbers are in the possession of the ABC Group”; as to the bank statements, Mr Gallagher was to provide those. Mr Whimp also said: “The purpose of my email to you [is] to ensure you agreed with the proposed response and/or advise if any of the stated responses has changes as a result of anything you are aware of?”

111    On 25 May 2012 Ms Atkinson responded to Mr Whimp (copied to Mr Gallagher, Mr McGaw and Mr Winter) by email. Ms Atkinson is a senior lawyer employed by R J Winter & Associates, lawyers. That firm acts for the secured creditor in these proceedings. In her email Ms Atkinson apologises for not getting back to Mr Whimp sooner.

112    As to the renovation compensation, Ms Atkinson observes that the relevant part of the objection is paras 40 and 41 and that: “The administrators can say that they have not obtained access to the ABC Group Intranet and are therefore not able to provide any further information in relation to the basis of the calculation of the fee” [emphasis added]. Ms Atkinson says that as to evidence of the agreement being breached, there was no written agreement and that it was an oral agreement as set out at para 20 of the objections. Ms Atkinson also says that as to the monthly revenue figures, NELC commenced managing the Centres in December 2007 and they were not transferred until then. Presumably, Ms Atkinson is confirming Mr Whimp’s earlier observation that, thus, “the actual accounts and therefore revenue numbers are in the possession of the ABC Group”.

113    On 27 May 2012 Mr Whimp sent an email to Mr Gallagher asking whether he would be able to speak with Ms Deen about these matters as Mr Whimp would be travelling on Monday and Tuesday and would not back until Wednesday.

114    On 30 May 2012 Ms Deen sent an email to Mr Whimp and Ms Atkinson (copied to others including Mr Gallagher) noting the earlier email chain just mentioned. Ms Deen asked Mr Whimp and Ms Atkinson “whether anyone had previously contacted the Liquidators of ABC to obtain the records regarding the invoices for renovation compensation amounts?” Ms Deen observes in her email that: “I’m not sure we can just say we are not able to provide the information without first attempting to obtain [some]” [emphasis added].

115    On 4 June 2012 Mr Whimp responded to that email by saying that he had left a message with Ms Deen on Friday 1 June to discuss the issue. Mr Whimp asked Ms Deen to call him.

116    On 4 June 2012 Mr Whimp sent an email to Ms Deen (copied to others) requesting information concerning changes to the QMS GST Group arising out of the appointment of the administrators. On 6 June 2012 Ms Deen responded to that question and concluded her email by asking Mr Whimp to advise “whether any steps had been taken to obtain documents from the Liquidators/Receivers of ABC Learning Centres”. On 6 June 2012 Ms Deen made a telephone call to Mr Whimp. He was unavailable. She left a message with someone else. On 6 June Ms Deen made a telephone call to Mr Gallagher who said that not all the management fees were paid and that he had one reconciliation, and a couple of reconciliations were to be found.

117    On 13 June 2012 Ms Deen sent an email to Mr Gallagher observing that as discussed last week Mr Gallagher had confirmed that “NELC did not [physically pay] management fees in the 2008 financial year and they will not show up in Bank Statements (as requested by the ATO). Ms Deen observes that Mr Gallagher was “going to find and email to me a reconciliation regarding the management fees paid by NELC to ABC which we would need to provide to the ATO. Can you please provide this reconciliation as soon as possible?” [emphasis added].

118    On 13 June 2012 Mr Gallagher sent an email to Ms Deen (copied to Mr Whimp and Ms Atkinson) attaching reconciliations of management fees as at 30 June 2008. Mr Gallagher said that he was certain that this information together with the relevant ledger had been supplied to the ATO during the course of the audit.

119    On 28 June 2012 the administrators wrote to Mr Whimp and Mr Gallagher referring to the ATO’s requests for information in relation to the objections to the assessments. The administrators observed that their understanding was that Mr Whimp and Mr Gallagher had reviewed the ATO information request and had confirmed that neither person had further documents to provide to the ATO in compliance with the notice. The administrators confirmed that Mr Gallagher had provided them with emails including copies of invoices issued by the ABC Group for the management fees to NELC for the 2008 income year.

120    The administrators said that they had reviewed the bank statements for NELC for the 2008 income year “and cannot find any payments which match the value of the invoices issued by the ABC Group”. The administrators said: “Please advise when and how payments were made of these invoices”. The administrators also noted that their solicitors had been provided with folders of material by Harris Black in relation to the objections. They said they had reviewed the folders. They noted a letter from Harris Black to the ATO dated 16 April 2010 enclosing documents (as a cover letter). The administrators asked Mr Whimp and Mr Gallagher whether they held copies of documents provided under the cover of that letter and if so could those documents be provided to the administrators as a matter of urgency.

121    The administrators noted that the current practice between the company and Goodstart was that invoices are issued with an Excel Spreadsheet detailing how the invoiced amount had been derived. The administrators asked whether this practice had been adopted by ABC and the company in relation to invoices issued by ABC “for renovation compensation expenses and management fees”. The administrators asked, “[if] not, did the Company ever query these charges and obtained spreadsheets/details of how the invoices were calculated”. The administrators asked for copies of all correspondence between the Company and ABC in relation to the calculation of the charges.

122    The administrators also enclosed an email from Belinda Atkinson to Martin Gallagher of 16 April 2011 and requested the production of a copy of the Spreadsheet detailed in item 1 of the email. The administrators also asked for the production of documents “for the queries highlighted in the email”.

123    The administrators also asked Mr Whimp and Mr Gallagher to please provide all documents within seven days. The administrators encouraged Mr Whimp and Mr Gallagher to raise any questions about these matters with Ms Deen.

124    Ms Belinda Atkinson’s email dated 26 April 2011 refers to eight categories of documents and information which she had requested. Six matters were highlighted in that email for the purposes of the attachment to the letter of the administrators dated 28 June 2012.

125    Also on 28 June 2012 the administrators wrote to the receivers and managers of ZYX Learning Centres Ltd (In Liquidation) (receivers and managers appointed), Mr Walker and Mr Moloney (of Ferrier Hodgson). ABC Learning Centres Ltd and ABC Developmental Learning Centres Pty Ltd had each changed their name to adopt the ZYX prefix. In that letter the administrators observed that the ATO had issued Amended Assessments for the 2007 and 2008 financial years and the company had lodged objections which were currently under review by the ATO. The administrators also observed that the ATO had requested further documentation from the administrators in relation to particular transactions and that some of the information fell outside the scope of the company’s records and represented documents which would be held as records of the ABC entities.

126    Accordingly, the administrators requested the assistance of Mr Walker and Mr Moloney in providing three classes of documents from the records of ABC, namely any records evidencing entries in the ABC books of account concerning invoices issued to QMS for renovation compensation amounts in the 2007 income year; any records substantiating the amount of each invoice, including documents or information used in calculating the fees, and the agreements breached by QMS; and, monthly revenue figures for childcare centres the subject of a Management Agreement between ABC and QMS for the period 1 July 2007 to 31 December 2007. The administrators enclosed a spreadsheet setting out the management fees in that period.

127    Also, the administrators said that because considerable time and expense could be involved in collating the documents, the administrators would be willing to offer their staff to assist in that process. They asked for confirmation that the records would be made available. They pointed out that QMS was required to provide the records to the ATO as soon as possible and therefore a prompt response would be appreciated from Mr Walker and Mr Moloney.

128    On 3 July 2012 Ms Deen had a telephone conversation with a representative from Harris Black who had called to advise that Mr Gallagher should have the bank statements; Harris Black were not sure how they were provided; there were no documents in archives; emails regarding the Management Agreement had already been provided; no further documents were available; Mr Whimp was away and unavailable; and matters could be followed up with Mr Gallagher.

129    On 10 July 2012 Ms Deen sent an email to Mr Gallagher observing that she had reviewed the documents given to her by Mr Gallagher on a USB stick and that it was not clear how the management fees had been paid. Ms Deen notes that two payments were made “to ABC on 21/12/2007 and 24/12/2007 of $8,000,000 and $5,599,708 respectively”. Ms Deen observes that the bank statements in the NELC records confirmed that these amounts have been debited from the NELC Account and the amounts were paid for “management fees”. However, Ms Deen notes that these payments were not accounted for in any of the spreadsheets Mr Gallagher had given Ms Deen. Ms Deen observes that she understood Mr Gallagher would be attending the Office of the Administrators that afternoon to meet with Goodstart. She requested Mr Gallagher to come in a little earlier to go through the documents with her. On 10 July 2012 Mr Gallagher sent an email to Ms Deen saying that the amount paid of $13,599,708 was shown in cell G8 in the spreadsheet and that Ms Deen had that spreadsheet available to her. Mr Gallagher said he would go through the documents with her if the proposed appointment went ahead.

130    On 14 August 2012 Ms Deen had a conversation with a representative of Ferrier Hodgson (Zayd Kathrada). Ms Deen was told that the documents sought by the administrators were on a server; the documents had to be identified; the most efficient way of providing the documents had to be worked out and discussions would need to take place regarding the best way of going through the documents. On 13 August 2012 Ferrier Hodgson had written to the administrators (now liquidators) setting out an estimate of the costs of providing the requested records. On 28 August 2012 Ms Deen restated the proposal earlier put that the (now) liquidators would consider providing staff to review and sort through the information subject to a hosting and user access fee being arranged for hosting the documents on a server and securing access.

131    On 29 August 2012 Zayd Kathrada responded by email advising that the 13 August 2012 quote represented the estimated cost of identifying the information. The extracted documents that may be relevant to the liquidators would then be provided for their review. Payment in advance would be required by Ferrier Hodgson before steps would be taken to compile and host the extracted documents onto a secure web-based review platform.

132    On 17 September 2012 the liquidators wrote to Mr Cunningham at the ATO. The liquidators noted that the ATO had requested the provision of further information from the administrators (now liquidators) of the company. The liquidators said that they had endeavoured to obtain that information, however, it was not immediately apparent on the company’s records or upon enquiries with the director that the information sought was in the hands of the company. The liquidators observed that enquiries indicated that the information could be obtained from the liquidators or receivers of ABC Learning Centres Pty Ltd and that enquiries made by the liquidators of QMS suggested that the process of obtaining the documents from the liquidators or receivers of ABC would be likely to take some time. Also, the liquidators observed that their role had been rendered more complicated by the appointment of receivers and managers to QMS by the Trustee of Zullo Investment Trust under a fixed and floating charge granted on 24 October 2011.

133    The liquidators then make this observation: “In the circumstances, the liquidators request that no decision on the objection lodged by the company be made for a period of at least 30 days in which time our client hopes to have addressed the complications presented by the receivership appointment and clarified the likely time recovered by the receiver/liquidators of [ZYX] to supply the documentation requested. Once this has been attended to we expect to be in a position to provide you with a timeframe for the provision of the documentation requested”.

134    There are further exchanges which will be mentioned shortly.

135    However, particular emphasis is placed by the receivers and managers of QMS (and the secured creditor, the Trustee) on the letter of the liquidators of 17 September 2012 as it is said to suggest a disposition on the part of liquidators to encourage the ATO to put off making a decision on the objections to the Amended Assessments. Secondly, the parts quoted at [133] are also said to suggest that the liquidators hoped to take steps to set aside the security under which the receivers and managers were appointed or, put more anecdotally by the receivers and managers, to “get rid of” the receivers and managers.

136    A number of things need to be noted about this lengthy sequence of exchanges concluding, at least to this point, in the letter of 17 September 2012.

137    First, there is no substance in the proposition that the administrators and then the liquidators did nothing, or nothing of substance, to progress the objections to the Amended Assessments. The reverse is the position. The administrators and then the liquidators affirmed to the ATO that the objections filed prior to their appointment, based on transactions undertaken prior to their appointment and evidenced by documents all brought into existence prior to their appointment and not entirely within their control, would be pursued.

138    Second, the exchanges show that the administrators were consistently engaging on the question of securing information and documents which would enable a response to be properly made to the ATO’s request for information on the particular topics reflected in the letter 20 April 2012.

139    Third, the liquidators were seeking to obtain documents from Ferrier Hodgson on the basis that the documents would be identified by Ferrier Hodgson, extracted and placed on a secure web-based review platform. The request for no decision to be made on the objections for a period of 30 days was explained or conditioned upon the time needed to obtain the documents from the receivers/liquidators of the old ABC entities.

140    Fourth, whilst it is true that the letter of 17 September 2012 also refers to the circumstance that the liquidators hoped within the 30 days to have addressed “the complications presented by the receivership appointment” by Zullo Family Holdings Pty Ltd, the liquidators as administrators had formed the view on advice that the granting of the security on 24 October 2011 was likely to be void under the Corporations Act, and that view was no doubt held by the liquidators on 17 September 2012 as it continues to be held at the date of making the present application.

141    There is nothing in the exchanges as outlined in these reasons which supports the contention of the receivers and managers and the secured creditor that the conduct of the administrators and then those persons as liquidators, reflects a disposition to do anything other than properly pursue the merits of the objections. There is nothing in the conduct which gives rise to a legitimate apprehension of partiality. There is certainly no substance in the proposition agitated for by the solicitors for the receivers and managers, Bennett & Philp, in the correspondence that that the administrators had done nothing from April 2012 to seek to advance the merits of the objections.

142    On 4 October 2012 the solicitors for the liquidators, McInnesWilson wrote to Mr Winter and Ms Atkinson on behalf of the secured creditor and Mr Lambros of Bennett & Philp on behalf of the receivers and managers of QMS. One aspect of that letter deals with the funding arrangement with the ATO and I will return to that matter shortly.

143    As to the taxation objections, McInnesWilson set out seven points in the letter and the respondents rely particularly on points 4 and 5 but also point 3. In those points observations are made that the decision on the objections “has been, at all times, in the hands of the delegate of the Commissioner”. Secondly, the “timing of that decision is an issue for the Commissioner and not one to be influenced by our clients. Thirdly, the objections reflect very broad grounds of objection “but appear to offer very limited evidentiary support”. The respondents say that these statements reflect a failure on the part of the liquidators to come to grips with the objections because the timing is not just an issue for the Commissioner; the liquidators can influence that question and finally, the notion that the grounds have “very limited evidentiary support” shows, in effect, a pre-determined view of the matter.

144    I do not accept these criticisms.

145    The chronology set out in these reasons shows that the administrators and the liquidators (and particularly Ms Deen) were committed to pursuing the objections and pursuing the sources of information which might enable a disciplined response to be made to the ATO. The matters in the McInnesWilson letter at points 3, 4 and 5 are matters of generality. Ultimately, the decision is in the hands of the delegate. The timing is a matter which ultimately will be determined by the delegate and the extent that the liquidators took the view that there was very limited evidentiary support for the grounds of objection, that no doubt was a view they held having had the experience of seeking out the field of documents required in order to answer the information request in a comprehensive way.

146    As to displacing the receivers and managers, submissions have been directed to the interaction between the liquidators and the receivers and managers concerning the production of books of account and other records. Criticisms are made of the liquidators in their failure to produce documents to the receivers and managers when asked for them, and the correspondence in response sets out factors which suggest that 51 out of 57 archive boxes were made available for inspection. The correspondence also debates whether notification from the receivers and managers that the books and records would be collected on a particular day was given arbitrarily and without proper notice. Different views are taken by the receivers and managers about that. I can see no point in debating those issues. On 3 October 2012 the liquidators wrote to Mr Currie setting out a listing of the company’s books of records available for collection by the receivers and managers that day.

147    On 15 October 2012 Bennett & Philp wrote to McInnesWilson asserting that they had instructions to file an appeal against the ATO’s failure to determine the objections to the Amended Assessments. Mr Lambros asserted that the administrators had taken no steps since April 2012 although that observation was said to be based on a concession made by the administrators/liquidators in an earlier letter. The earlier letter does not fairly bear that construction.

148    To the extent that this correspondence is said to suggest that there is demonstrated “cause” for legitimate apprehension that the liquidators have engaged or might engage with the ATO in a way which suggests or arguably suggests that the liquidators are disinterested in pursuing the merits of the company’s objections to the Amended Assessments or disinterested in the merits of any appeal from the objection decision now made, I am not satisfied there is any basis for that contention. I am not satisfied that these exchanges provide a foundation upon which the appointment of the present liquidators ought to be refused on the contended footing that their conduct to date gives rise to apprehended partiality or an apprehension that the liquidators, if appointed by the Court, would take a position adverse to the creditors and partial to the ATO in dealing with an appeal from the objection decision. I am not satisfied that “cause” has been shown in the sense contemplated in Re Biposo Pty Ltd; Condon v Rodgers (1995) 120 FLR 399; (1995) 17 ACSR 730; Domino Hire v Pioneer Park (2003) 21 ACLC 1,330; Re Allebart Pty Ltd (In Liq) and The Companies Act [1971] 1 NSWLR 24.

149    In any event, the appointment can be conditioned by an order that the liquidators shall not discontinue or settle the company’s appeal from the objection decision without the approval of the Court.

150    The letter from McInnesWilson dated 4 October 2012 in explaining matters relating to the initial listing of the application, sets out this explanation: “The application was not filed earlier because the liquidators had sought funding from creditors in order to bring the application and it took some time for funding arrangements to be finalised … [funding] was confirmed shortly before the application was lodged. Although lodged on 14 September, it can be readily seen on the sealed documents that the application was not accepted for filing until 18 September 2012”. On 9 October 2012 Bennett & Philp asked the liquidators’ solicitors to advise of the name of the creditor and whether or not any funding was in place. On 15 October 2012 Bennett & Philp wrote a letter to the solicitors for the liquidators noting that there had been no response on the funding point, and pressed for advice as to whether the funder was the ATO. McInnesWilson on 22 October 2012 said in a letter that the receivers and managers had no entitlement to demand to know the source of funding available to the liquidators. On 22 October 2012 Bennett & Philp responded observing that the receivers and managers could only conclude that the liquidators were funded in the winding-up application by the ATO thus giving rise to a conflict of interest.

151    The receivers and managers say that the reluctance of the liquidators, through their lawyers, to say whether the ATO was providing funding for the winding-up application, suggests a lack of candour and a recognition that the provision of funding by the ATO is problematic as it places the liquidators in an invidious position by reason of the conflict of interest.

152    I do not accept that the fact of funding, by itself, gives rise to a conflict of interest. The question is whether the liquidators have shown by their conduct partiality in their dealings with the ATO. In other words the evidence must show conduct giving rise to an apprehension of partiality. I do not accept that the conduct said to give rise to the apprehension, does so, viewed objectively and reasonably, by an interested observer.

153    There is however another point made in relation to the funding agreement. The secured creditor required Mr Lucas to be available for cross-examination about aspects of the agreement but, of course, Mr Lucas was open to cross-examination on any matters. Ms Atkinson cross-examined Mr Lucas about the making of the funding agreement with the ATO, when it was made and whether it might endure for 3 months or more. Mr Lucas accepted that an oral agreement had been reached with the ATO although the written agreement giving expression to the oral agreement was yet to be signed. It was not clear from the evidence whether the oral agreement was sufficient or whether the arrangements would only be struck, as a matter of law, once the written agreement was executed. However Mr Lucas seemed to accept that he had an agreement in place and that it was oral. I proceed on the basis that Mr Lucas entered into an agreement for funding which is likely to endure for more than 3 months and that, as he conceded, he has not first obtained the approval of the Court or a resolution of the creditors.

154    I do not draw any adverse inference by reason of the failure of the liquidators to obtain the consent of the creditors or the approval of the Court prior to reaching the oral agreement with the ATO. Mr Lucas recognised that an approval might be obtained after the event. His failure to first obtain a resolution or Court approval is not a basis for disqualifying the present liquidators from appointment as liquidators should the company be wound-up in insolvency.

155    As to the disqualifying conduct issues, it should be noted that the cross-examination of Mr Lucas was very short and confined to the making of the funding agreement. None of the factors going to questions of partiality, a contended disposition not to progress the objections to the assessments or the factual matters going to the heart of the contentions advanced by the receivers and managers (and the secured creditor), were put to Mr Lucas for his answers.

156    The secured creditor contends that the present case is analogous to that of Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd [2012] FCA 363 and that the present application ought to be adjourned. The foundation upon which Bayconnection is said to be of analogical relevance is that the dominant debt of the company is the debt due to the Commissioner; the case in favour of a meritorious appeal from the Amended Assessments is said to be reasonably arguable, and there is no prejudice to the revenue in terms of the timing of recovery or otherwise. Bayconnection is not a relevant analogy. In this case, although the tax debt is a significant debt (and for present purposes I accept that the appeal from the objection decision is reasonably arguable), there are other debts of substance owed to third parties which are due and payable and have not been paid. There is no real sense in which the company is otherwise solvent but for the debt due to the Commonwealth by reason of the Amended Assessments conditioned by an appeal which is reasonably arguable. The company, having regard to all of the relevant circumstances, is not presently solvent and the creditors have resolved that it be wound up. I have had regard to all of the written submissions on behalf of the secured creditor which give emphasis to the merits of the company’s proposed appeal from the objection decision; the contended incorrect assertions of the ATO in the Notice of Objection decision and each of the factors set out particularly at para 41 of those submissions.

157    Nevertheless, I am not satisfied that the interests of the creditors are served by adjourning the present application.

158    The liquidators have been engaged in the administration of the affairs of the company since 3 January 2012. A very considerable investment has been made in their work to date. Their knowledge and understanding of the transactions of the Company and the investment made in them to date ought to be preserved for the benefit of the creditors.

159    I am satisfied that the Company is insolvent.

160    The creditors at the meeting resolved that it be wound-up.

161    I am satisfied that there is a serious question to be determined in relation to the granting of the fixed and floating charge on 24 October 2011.

162    I am satisfied that it is in the interests of creditors as a whole that the company be wound-up in insolvency. I am satisfied that the interests of the creditors are served by appointing the present liquidators as liquidators of the Company in a winding-up insolvency. I propose to so order. I will also order that any appeal from the Commissioner’s objection decision be not abandoned, discontinued or settled without the approval of the Court.

Associate:

Dated:    18 December 2012