FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Specialised Finance Group Pty Ltd, in the matter of Specialised Finance Group Pty Ltd [2013] FCA 1415

THE COURT ORDERS THAT:

1.    The defendant, Specialised Finance Group Pty Ltd, be wound up in insolvency.

2.    John Greig, an official liquidator, be appointed liquidator of the defendant.

3.    The plaintiff’s costs be fixed in the sum of $9,075.00 and reimbursed in accordance with s 466(2) of the Corporations Act 2001 (Cth).

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

REASONS FOR JUDGMENT

1    The plaintiff (“the Deputy Commissioner”) has applied under s 459P of the Corporations Act 2001 (Cth) for an order winding up the defendant (“the Company”) in insolvency. It relies upon the statutory presumption of insolvency arising under s 459C(2)(c).

2    The Company opposes the application on the ground that that it is solvent. It submits, in the alternative, that the Court should exercise its discretion to refuse to order that the Company be wound up because it proposes to commence proceedings that, if successful, will mean that it owes no tax debt.

Background

3    On 23 April 2013, the Deputy Commissioner posted a creditor’s statutory demand to the registered office of the Company. The demand was for the sum of $90,370.61. That amount consisted of a running balance account deficit debt and a superannuation guarantee charge debt.

4    The Company failed to comply with the statutory demand within the prescribed period and a presumption of insolvency arose from 14 June 2013.

5    On 19 July 2013, after the time for compliance with the statutory demand had expired, the Company lodged its Business Activity Statement (“BAS”) for the quarter ended 30 June 2013, claiming input tax credits (“ITCs”) of $83,785.00 CR. The Company submits that it “sought to satisfy the tax debt” by lodging the BAS.

6    The Deputy Commissioner commenced an audit of the BAS. On 9 September 2013 the Deputy Commissioner assessed the Company as liable to pay a penalty of $20,250.00. On 11 September 2013, the Deputy Commissioner issued a Notice of Amended Assessment which required the company to pay the sum of $81,000.00. On 5 November 2013, the Deputy Commissioner disallowed the Company’s objection to the amended assessment.

7    The Deputy Commissioner claims that the total presently due and payable by the Company, including interest, is $105,393.25.

8    The Deputy Commissioner’s audit disallowed the ITCs claimed in respect of invoices issued to the Company by a deregistered company formerly called Specfin Pty Ltd (“Specfin”) and by Propwill (Warwick) Pty Ltd (“Propwill”).

9    Specfin was deregistered on 28 October 2012. On 28 June 2013 Specfin allegedly issued an invoice to the Company in the sum of $360,000.00 plus $36,000.00 GST in respect of “unbilled management services”. Specfin and the Company had common directors. The Company asserts that the directors did not realise that Specfin had been deregistered. It asserts that Specfin continued to trade despite its deregistration and that the Company continued to provide it with management services. An application has been made to the Australian Securities and Investments Commission (“ASIC”) to reinstate Specfin. The Deputy Commissioner considered that the Company could not make a creditable acquisition from an entity that does not exist.

10    Propwill allegedly issued an invoice to the Company on 28 June 2013 in the sum of $450,000.00 plus $45,000 GST. The circumstances of the transaction are sketchy, but it seems that the Company claims that it forgave a debt of $450,000.00 owed to it by Propwill and, in exchange, acquired a right to the damages recoverable in a legal proceeding that Propwill intended to commence. The Deputy Commissioner considered that in circumstances where there was only a mere possibility that Propwill might decide to take legal action against an unspecified party, in relation to an unspecified cause of action, at some unspecified time in the future, there was no assignment of any chose in action. The Company and Propwill have common directors and the Deputy Commissioner also concluded that the transaction was not at arm’s length.

11    There is evidence that the Company has instructed its solicitors to apply to the Administrative Appeals Tribunal (“the AAT”) for review of the Deputy Commissioner’s decision to disallow the objection, but no such application has yet been made, despite the decision having been made on 5 November 2013.

12    The evidence relied upon by the Company to prove its solvency is very limited. Its managing director, Simon John Price, has sworn two affidavits. He annexes the Company’s financial statements and asserts that its assets exceed its liabilities. He says that if the application to the AAT is successful it will owe no tax, but even if the application is unsuccessful, the Company is capable of paying the tax debt “given a reasonable time and opportunity”.

13    The Company also relies upon two affidavits of an accountant, Michael John Sheehy. Mr Sheehy deposes that he has formed the opinion that the Company’s assets exceed its liabilities, that it is trading profitably and that “given a reasonable time and opportunity” the Company is capable of paying the tax debt.

14    Mr Sheehy says that an asset of the Company is a loan to Priven Pty Ltd (“Priven”), the balance of which was approximately $657,000.00 as at 31 October 2013. He has reviewed the financial statements of Priven for the four months up to 31 October 2013 and it is his view that Priven is trading profitably with strong cash flows and in the normal course of business is able to fulfil its current interest payment obligations under the terms of the loan agreement with the Company.

15    Importantly, Mr Sheehy states that his opinions are based upon the accounts and information provided by Mr Price, but that he has not conducted any audit or detailed verification procedure. He cannot give any positive assurance relating to the accuracy of the information presented to him.

16    The Company’s balance sheet as at 31 October 2013 shows assets of $1,955,515.66 and total liabilities of $64,310.32, giving it net assets of $1,891,205.34. Its major assets are shown as a loan to Priven of $592,344.55 and accrued interest owed by Priven of $52,000.00, a loan to Specfin of $287,352.23 and goodwill of $641,128.33.

The legislation

17    Section 459A of the Corporations Act provides that on an application under section 459P, the Court may order that an insolvent company be wound up in insolvency. Section 459P of the Corporations Act permits a creditor to apply to the Court for a company to be wound up in insolvency.

18    Section 459E of the Corporations Act allows a person to serve on a company a demand relating to a debt that the company owes to the person that is due and payable and whose amount is at least the statutory minimum.

19    Section 459F(1) of the Corporations Act provides that if, at the end of the prescribed period for compliance with the statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period.

20    Section 459C(2)(a) of the Corporations Act provides that the Court must presume that the company is insolvent if, during or after the three months ending on the day when the application was made, the company failed (as defined by s 459F) to comply with a statutory demand.

21    The parties were agreed that the Company is presumed to be insolvent by reason of its failure to comply with the Deputy Commissioner’s statutory demand.

22    Section 95A of the Corporations Act defines solvency as follows:

A person is solvent if, and only if, the person is able to pay all the person’s debts as and when they become due and payable.

23    Section 467(1) of the Corporations Act provides that in hearing a winding up application the Court may, inter alia, dismiss the application, even if a ground has been proved on which the Court may order the company to be wound up.

Consideration

24    In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44], Weinberg J summarised a number of propositions that emerge from the authorities concerning the operation of s 459C of the Corporations Law:

    The respondent is presumed to be insolvent and as such bears the onus of proving its solvency.

    In order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent.

    Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared.

    There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency.

    The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account.

    The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored.

(Citations omitted.)

25    The Company submitted that the evidence of Mr Sheehy and the financial statements demonstrate, on the balance of probabilities, that the Company is solvent. The Company argued that it is solvent because its assets significantly exceed its liabilities and, further, that it has a source of income, namely Priven, that allows it to pay its debts as and when they become payable. The Company asserted that it lends money to Priven which is on-loaned to persons who wish to purchase motor vehicles. It argued that there is evidence that the Company receives loan repayments from Priven which then allows the Company to pay its debts.

26    The Company argued that the debt in the amount of $592,344.55 owed by Priven and the debt in the amount of $287,352.23 owed by Specfin should be considered legitimate and readily realisable.

27    The Company argued that even if the debts owed to it by Priven and Specfin are not taken into account, the net asset position of the Company would still be in the order of $906,609.55 CR and that this demonstrates the solvency of the Company.

28    There are fundamental problems with the evidence relied upon by the Company in its attempt to prove its solvency.

29    Mr Price annexes the Company’s financial statements and asserts that its assets exceed its liabilities and that it is capable of paying its debts, including its tax debt, given a reasonable time and opportunity. His evidence is notable for what he does not say. He does not say that the accounts are accurate. He does not say that they are complete. He does not say that he is familiar with the financial position of the Company. He does not identify any assets that are able to be converted into cash within a relatively short time. He does not annex primary documents, such as loan agreements, to demonstrate that the Company has the significant assets listed in the balance sheet. The financial statements are, at best, a bare assertion that the Company claims that it has certain assets and liabilities and has had certain income and expenditure.

30    The asset position of the Company may be relevant to its solvency to the extent that its assets may be readily converted into cash to allow it to pay its debts. However, the evidence led by the Company does not prove that it in fact has all of the significant assets shown in the balance sheet. Further, apart from relatively small amounts of cash in hand, deposits and some funds held on trust for it, the evidence does not demonstrate which of its assets, if any, are able to be readily converted into cash.

31    There is a paucity of evidence demonstrating that the Company has lent significant sums of money to Priven and that the loans are being repaid. Mr Price asserts that funds are “continually being loaned to Priven”. There is some evidence that Priven paid the Company various amounts in May 2013, suggesting the possibility that this may have been towards the repayment of a loan, but there is no evidence that this was the reason for the payments. There is no evidence of recent repayments by Priven. No loan agreement has been produced. The terms upon which the loans were made are not described in the material.

32    The balance sheet as at 30 June 2013 shows an amount owing by Priven of $197,939.75, whereas the balance sheet as at 31 October 2013 shows the amount to be $592,344.55. This was said to reflect additional loans made by the Company to Priven in that period. However, there is nothing else in the balance sheet or the profit and loss account for that period to reflect the making of any additional loans, or the source of funds from which the Company was able to make such additional loans. Therefore, the indication in the balance sheet as at 31 October 2013 that a very substantial sum is owed by Priven to the Company must be treated with caution.

33    The balance sheet as at 31 October 2013 also indicates that Specfin owes the Company $287,352.23. This compares to $22,912.48 in the balance sheet as at 30 June 2013. It is difficult to see how this can be regarded as a current asset when Specfin is deregistered. In addition, there is the same paucity of evidence of the making of loans to Specfin and the terms upon which any loans were made and nothing in the balance sheet and profit and loss account to indicate the source of funds from which the loans could have been made. The accounts must also be treated cautiously for these reasons.

34    There are other reasons to treat the Company’s accounts with some scepticism. The liabilities in its balance sheet do not include the present tax debt to the Commonwealth. The balance sheet does not refer to the $396,000.00 that the Company asserts it owes to Specfin or the $495,000.00 that is apparently owed to Propwill.

35    The major asset of the Company is said to be goodwill valued at $641,128.33. This is an asset that will not be able to be converted into cash except by sale of the Company’s business.

36    There is evidence of dishonour fees charged by two creditors in April and June 2013. These are unexplained.

37    The Company has not paid any part of its tax debt. The amount of $81,000.00 plus interest is due and payable. The Notice of Amended Assessment has been produced. Its production is conclusive evidence that the assessment was properly made and the amount of the assessment is correct: s 350-10, Sch 1 of the Tax Administration Act 1953 (Cth).

38    The Company’s profit and loss account shows net income of $11,452.19 earned by the Company for the period from July to October 2013. There is no evidence as to the trading activities it carried out to earn that income, apart from making loans to Priven, or what trading activities it is presently carrying out. There is no evidence that, apart from any repayments that might be made by Priven, the Company has some source of income that allows it to pay its debts.

39    Little weight can be placed upon Mr Sheehy’s opinions that the Company’s assets exceed its liabilities, that it is trading profitably and that Priven has the capacity to repay the loan, given that he has not audited or otherwise verified the accounts. It is notable that Mr Sheehy does not depose that the Company is able to pay its debts as and when they fall due, or anything like that, merely that it is capable of paying its tax debt “given a reasonable time and opportunity”.

40    The evidence of the Company’s sources of funds and assets and liabilities is, in the circumstances, far from the “fullest and best” evidence. I do not accept that the Company has discharged its onus of proving that it is solvent.

41    It is next necessary to consider the Company’s submission that the Court’s discretion should be exercised in favour of dismissing the application.

42    The Company submitted that if its proposed application to the AAT is successful, there will no longer be any tax debt to the Commonwealth. The first step in its proposed argument is its contention that it is “highly likely” that Specfin will be reinstated. It was deregistered as a result of non-payment of ASIC’s fees, and ASIC’s guidelines indicate that it will consider reinstating a company’s registration where there has been a procedural defect or oversight leading to deregistration. The Company argued that upon reinstatement the Company is deemed to be reinstated for all purposes and is taken to have continued in existence as if its registration had never been cancelled: s 601AH(5) of the Corporations Act. The Company noted that the only basis upon which the Deputy Commissioner refused to allow the ITC of $36,000.00 was the fact that Specfin was deregistered.

43    The Company also argued that the Deputy Commissioner’s finding that the debt to Propwill did not involve assignment of a chose in action was erroneous, but its submissions did not descend to any detailed argument about why it was wrong. It did not address any argument as to why the Deputy Commissioner’s finding that the transaction was not at arm’s length was wrong. It submitted that it has reasonable prospects of success in its proposed application to the AAT.

44    The starting point is that the Company is presumed to be insolvent. The statutory scheme provides no basis for an assumption in favour of dismissal of the application when a company that is presumed to be insolvent disputes the existence of a debt: Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (2011) 244 CLR 1 at [30]. However, the Court can properly have regard to whether the taxpayer has a reasonably arguable case in the AAT in considering the exercise of its discretion: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at [13].

45    There are several difficulties with the Company’s submission.

46    The Company does not dispute that it owes a debt to the Commonwealth. It has not sought leave under s 459S to oppose the winding up on any basis that it could have relied on in an application to set aside the statutory demand. Its argument is that it will be able to demonstrate that it is solvent if the Notice of Amended Assessment is set aside because it will have no tax debt to pay. It may be noted that in order for the tax debt to be wholly extinguished it would be necessary for the Company to succeed in the AAT in respect of both the Specfin and the Propwill invoices.

47    I do not accept the Company’s submission that the evidence shows that it is “highly likely” that Specfin will be reinstated. ASIC’s policy is that it will reinstate a Company’s registration under s 601AH(1) of the Corporations Act if each of seven matters are satisfied. One of those matters is that information is provided which satisfies ASIC that the Company would be solvent if its registration were to be reinstated. No evidence was placed before the Court that Specfin would be solvent if reinstated.

48    Even if Specfin is reinstated, that does not mean that the AAT would automatically set aside the Deputy Commissioner’s assessment. It seems highly likely that the Deputy Commissioner would argue before the AAT that there are circumstances which require that the invoice be treated with scepticism, including that the Company and Specfin were related entities, that there is no evidence of consideration being provided by the Company for the transactions, that no invoice from Specfin was raised until after the statutory demand had been served and that the amount of Specfin’s invoice is not shown in the Company’s accounts as a debt.

49    The Company did not provide argument of any substance as to its case that the AAT should allow a GST credit in respect of the Propwill transaction. The agreement between the Company and Propwill was not before the Court. The Company did not explain how it proposed to persuade the AAT that, contrary to the Deputy Commissioner’s finding, the transaction was not at arm’s length. I do not accept that the Company has shown that it has a reasonably arguable case before the AAT in respect of the Propwill transaction.

50    The evidence does not establish that the Company would be solvent even if it succeeds in the AAT and there is no tax debt left to pay. It owes $396,000.00 to Specfin. It also owes $495,000.00 to Propwill. The evidence does not demonstrate that the company is capable of paying either of those debts. If a company is insolvent without taking the disputed debt into account, then the Court is “almost certainly” required to allow the winding up to proceed: Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2007) 69 NSWLR 374 at [72].

51    In these circumstances, I decline to dismiss the application in the exercise of the Court’s discretion.

52    During the hearing, I enquired whether the Company was willing and able to pay the tax debt now as a condition of an adjournment of the application pending determination of the dispute by the AAT. Such a payment would avoid prejudice to the collection of revenue and would be a matter relevant to the way in which the discretion is exercised: cf Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd at [58], Deputy Commissioner for Taxation v Tilley Property Management Services Pty Ltd [2011] FCA 678 at [24], per Logan J. The Company was only prepared to pay half of the tax debt now and the remainder in the event that it is unsuccessful in the AAT. A statutory objective is that applications to wind up a company in insolvency are to be determined within 6 months, subject only to extensions granted in special circumstances: Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd at [33]. I do not think that the Company’s offer to pay only half the debt now is a sufficient reason to allow an adjournment pending a determination by the AAT.

53    I will order that the Company be wound up in insolvency, that John Greig, an official liquidator, be appointed liquidator of the Company, and that the Deputy Commissioner’s costs be fixed in the sum of $9,075.00 and reimbursed in accordance with s 466(2) of the Corporations Act.

Associate:

Dated:    23 December 2013