FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation, in the matter of Radtra Pty Ltd v Radtra Pty Ltd [2017] FCA 1181

ORDERS

THE COURT ORDERS THAT:

1.    The application by the administrators appointed to the Defendant for the adjournment of the hearing of the winding up application is refused.

2.    Pursuant to s 447A of the Corporations Act 2001, the administration of the Defendant upon which the directors resolved on 18 September 2017 is terminated.

3.    Radtra Pty Ltd ACN 139 103 718 be wound up in insolvency under the Corporations Act 2001.

4.    Timothy David Mableson and Martin David Lewis be appointed as joint and several liquidators of the Defendant.

5.    Compliance with r 5.11(3) of the Federal Court (Corporations) Rules 2000 be dispensed with pursuant to s 467(3)(b) of the Corporations Act 2001.

6.    The Plaintiff’s costs (including reserved costs) be taxed and reimbursed out of the property of the Defendant in accordance with s 466(2) of the Corporations Act 2001.

7.    Pace Legal’s costs (including reserved costs) be taxed and reimbursed out of the property of the Defendant in accordance with s 466(2) of the Corporations Act 2001.

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

ORDERS

THE COURT ORDERS THAT:

1.    The  application by the administrators appointed to the Defendant for the adjournment of the hearing of the winding up application is refused.

2.    Pursuant to s 447A of the Corporations Act 2001, the administration of the Defendant upon which the directors resolved on 18 September 2017 is terminated.

3.    Radin Legal Pty Ltd ACN 150 914 015 be wound up in insolvency under the Corporations Act 2001.

4.    Timothy David Mableson and Martin David Lewis be appointed as joint and several liquidators of the Defendant.

5.    Compliance with r 5.11(3) of the Federal Court (Corporations) Rules 2000 be dispensed with pursuant to s 467(3)(b) of the Corporations Act 2001.

6.    The Plaintiff’s costs (including reserved costs) be taxed and reimbursed out of the property of the Defendant in accordance with s 466(2) of the Corporations Act 2001.

7.    Pace Legal’s costs (including reserved costs) be taxed and reimbursed out of the property of the Defendant in accordance with s 466(2) of the Corporations Act 2001.

8.    The Law Society of South Australia’s costs (including reserved costs) be taxed and reimbursed out of the property of the Defendant in accordance with s 466(2) of the Corporations Act 2001.

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

EX TEMPORE REASONS FOR JUDGMENT

WHITE J

1    The Court was to continue the hearing this morning of two applications by the Deputy Commissioner of Taxation (DCT) for the winding up of two companies: Radin Legal Pty Ltd and Radtra Pty Ltd.

2    However, yesterday afternoon, at 3.15 pm and 4 pm respectively, the directors of Radin Legal and Radtra resolved, pursuant to s 436A of the Corporations Act 2001 (Cth), that the companies should appoint administrators. The consequence was that Mr James and Mr Morgan were appointed as joint and several administrators of the two companies. The resolutions to which I have just referred were preceded in each case by a resolution by the directors that the company was insolvent or likely to become insolvent at some future time.

3    The administrators now apply for an adjournment of the hearing of the DCT’s winding up applications for a period of two weeks for the principal purpose of allowing them the opportunity to investigate the affairs of each of Radin Legal and Radtra and, if appropriate, to provide further evidence bearing on the question of whether the Court should refrain from making the winding up orders.

4    The first question then is whether the Court should accede to the applications for the adjournment.

5    The applications are opposed by the DCT and by the Law Society of South Australia, on whose behalf an affidavit has been filed indicating that Radin Legal is indebted to it in the sum of $65,399.18. Another creditor, Pace Lawyers, has provided an affidavit indicating that Radin Legal is indebted to it, but its counsel indicated that it would abide the decision by the Court with respect to the adjournment.

6    I record first some matters concerning the factual setting in which the applications for the adjournment are made.

7    Radin Legal is an incorporated legal practice. Radtra is the corporate trustee of the Radin Legal Service Trust (RLST), which provides administrative services to Radin Legal pursuant to a service agreement. Those services have included the provision of administrative staff and office equipment.

8    The application for the winding up of Radtra was filed on 4 July 2017. It had been preceded by the service of a Statutory Demand by the DCT on Radtra on 24 January 2017 claiming the sum of $183,068.28. Radtra had applied to have that Statutory Demand set aside, and a Registrar had extended the time for compliance to 7 April 2017. However, on 24 May 2017, the application to set aside was dismissed by consent.

9    In the case of Radin Legal, the application for winding up by the DCT was filed on 8 August 2017. It had been preceded by a Statutory Demand for the payment of $147,720.75 which was served on 10 April 2017. The application was to be heard by a Registrar of the Court on 13 September 2017. However, at the commencement of that hearing, counsel for Radin Legal applied for the application to be referred to a Judge, and thereupon, as required by s 35A(7)(b) of the Federal Court of Australia Act 1976 (Cth), the Registrar ceased hearing the matter.

10    The application for the winding up of Radtra was to be heard by a Registrar on 21 September 2017. Given the close relationship between the two applications, I directed that the Deputy Commissioner’s application with respect to Radtra be heard at the same time as the application concerning Radin Legal, and both applications were listed for hearing on 14 September 2017.

11    However, shortly after the commencement of the hearing on 14 September 2017, at the request of counsel for Radin Legal and Radtra, I adjourned the hearing of the two applications for winding up to this morning. This adjournment was granted to give Radin Legal and Radtra the opportunity to obtain representation by counsel and to provide further evidence in support of the opposition to the making of the winding up orders indicated by the two companies. Neither Radin Legal nor Radtra did file any further evidence. Instead, as already noted, each appointed administrators on the afternoon of 18 September 2017.

12    The commencing position for the Court’s consideration is that contained in s 440A(2) of the Corporations Act. That section provides that the “Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up.” The Court also has an alternative source of power to adjourn the hearing, being that contained in s 467(1)(b) of the Corporations Act. That power is to be exercised having regard to the interests of justice in the case.

13    In his affidavit made on 28 August 2017, Mr Michael Radin, who is the sole director and principal of Radin Legal, describes Radin Legal as a small litigation firm which accepts instructions in various fields of law. Its offices are at Gawler. Mr Radin describes Radin Legal’s predominant client base as being families and small businesses. He also deposed that “cash flow is a major structural issue” for Radin Legal.

14    Mr Radin deposed that Radtra does not undertake any commercial activity on its own account, other than in its capacity as corporate trustee of the RLST. It is very apparent that Radtra is entirely dependent on the management fee which it receives from Radin Legal as its only other sources of income have been minor amounts by way of interest and insurance recoveries.

15    An important consideration bearing on whether an adjournment is appropriate is the evidence indicating the extent and duration of the insolvency of Radin Legal and Radtra. The affidavit evidence provided by the DCT indicates that Radtra is now indebted to the Australian Taxation Office (ATO) in the sum of $215,189.42 and that Radin Legal is indebted to the ATO in the sum of $160,730.16. I have already mentioned that The Law Society of South Australia claims that Radin Legal is indebted to it in an amount of the order of $65,000.

16    In addition, it is apparent that each of Radtra and Radin Legal must have borrowings from a financial institution such as a bank. That is because trading profit and loss statements for each company, to which I will refer again, show significant amounts paid by way of interest. The extent of the indebtedness to the financial institutions has not been shown.

17    There has been no reduction of the indebtedness of either company to the DCT since the service of the Statutory Demands. I observe that the schedules attached to the Statutory Demands in each case show that the sums demanded are comprised of a substantial running balance account deficit and unpaid superannuation guarantee charges. In the case of Radin Legal, the running balance account deficit was made up of unpaid Goods and Services Tax, PAYG instalments, Fringe Benefits Tax instalments and accrued interest. The running balance account deficit in the case of Radtra was comprised of the same components. Some of these liabilities have been outstanding for several years, in some instances since 2011.

18    The unpaid superannuation guarantee charges in the case of Radin Legal extend back to the quarter commencing on 1 January 2014, the payment for which became payable on 28 July 2014. In the case of Radtra, the unpaid superannuation guarantee charges extend back to the quarter commencing on 1 July 2014 with that payment having become payable on 28 October 2014.

19    Mr Radin annexed to his affidavit single page trading, profit and loss statements for Radin Legal and the RLST. In the case of Radin Legal, these show:

20    In the case of RLST, the trading, profit and loss statements reveal:

21    These extracts from the trading profit and loss statements indicate that Radin Legal has traded at a loss in each of the last two financial years and, although it made a small profit of $1,582.33 in the 2015 financial year, it had an accumulated loss at the commencement of that year of $65,532.25. The RLST is shown as having traded at a profit before tax in the 2016 and 2017 years. It is apparent, however, that its profitability depends on the amount of the management fee which it receives from Radin Legal, so its solvency turns on the solvency of Radin Legal. In this respect, I note that, even if the amount of management fee paid by Radin Legal to Radtra had been reduced to the minimum amount necessary for Radtra to have broken even in the 2016 and 2017 years, Radin Legal would still not have traded profitably in those years.

22    These matters indicate that the indebtedness of the two companies is significant. The indebtedness does not seem to be attributable to a one-off event or to recent unforeseen circumstances which may, given time, be able to be corrected. Instead, it seems that each of Radtra and Radin Legal have had an endemic problem in meeting their liabilities.

23    It is also pertinent that, apart from the trading profit and loss statements, neither Radin Legal nor Radtra have provided other financial statements such as balance sheets, bank statements, statements of shareholders’ funds, budgets or cash flow forecasts.

24    The principal matter which I understood was to be relied upon in support of the submission that the discretion to wind up should not be exercised and to which Mr Radin had deposed to in his affidavits was the amount of the debtors of Radin Legal. Although Mr Mansueto, on behalf of the administrators, did not refer to this specifically this morning, it seems to me that this must be the substantial point which can be relied upon to support the adjournment given the extent of the insolvency revealed by the short summary I have given. An examination of the prospects of recovery from the debtors could be the subject of an investigation by the administrators.

25    The figures provided by Mr Radin suggest that the firm may be owed $595,891.67 by clients to whom accounts have already been sent and that it has work in progress of the order of $150,234.50. Those figures total about $740,000. However, there is very little evidence to support the view that those amounts may be recoverable by Radin Legal in the near, or even long term, future. At a time when it is to be expected that Radin Legal would have put before the Court all the material that it could to demonstrate that recoverability, that seemingly being the matter upon which it intended to rely by way of resisting the winding up orders, it did not provide that kind of evidence.

26    Given the financial circumstances of Radin Legal which I have outlined, it is in my view, reasonable to suppose that Radin Legal would already have taken all the steps reasonably available to it to recover amounts due to it by its debtors. It can be inferred that those steps have not been successful, or at least not successful to a significant extent. There is no evidence as to when the amounts by accrued work in progress will become due and payable by the clients.

27    I observe that an aged debtors report of Radin Legal prepared in late 2016 and provided to the DCT indicated at that time, that the greater proportion of the amount of debtors had been outstanding for more than 90 days. It seems reasonable to infer that some of it may have been outstanding for extended periods.

28    The principles relating to a court’s exercise of the discretion under s 440A(2) are settled. They are conveniently summarised in the judgment of Black J in Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402; (2012) 92 ACSR 88, at [16]-[21] as follows:

[16]    Section 440A(2) of the Corporations Act provides that:

“The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.”

That section requires the Court to adjourn the proceedings if the relevant pre-condition is satisfied: Deputy Commissioner of Taxation v Polcarp Pty Ltd [2011] FCA 1142 at [4]. Generally, an adjournment under s 440A(2) of the Corporations Act requires that the Court is satisfied that it is in creditors' interests to continue the administration in all the circumstances, and this requires that there be sufficient possibility, as distinct from mere optimistic speculation, that creditors' interests will be accommodated to a greater degree in an administration than in a winding up: Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457; TCS Management Pty Limited v CTTI Solutions Pty Ltd [2001] NSWSC 830 at [15]; Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admins apptd) (2009) 71 ACSR 81; Deputy Commissioner of Taxation v C-Change Cairns Pty Ltd [2011] FCA 1372.

[17]    In Creevey v DCT above, McPherson JA, speaking for the Queensland Court of Appeal, said that the question of whether an administration should continue, rather than that there be a winding up, was “closely related to the further question of whether the creditors could hope to get more by payment of their debts from one form of process or administration than from the other”. His Honour observed at 457:

“In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.”

[18]    In Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47; (2003) 44 ACSR 377, Campbell J, as his Honour then was, said (at [18]):

“Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase.”

[19]    In Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 at [77], Austin J observed that:

“The requirement for “persuasive evidence”, if considered in isolation from the facts and decision in that case, could set the barrier fairly high. In Waste Recycling, Santow J (at 199) noted that a less stringent formulation has been adopted in an unreported case in the Federal Court, although he later applied the Creevey dictum in Re First Netcom Pty Ltd (2000) 35 ACSR 615. Campbell J applied the Creevey test in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377. For present purposes, it is not necessary to decide upon the precise standard of proof. Whatever be the correct formulation, it is plain that if the evidence points to nothing more than “mere optimistic speculation” that a proposal might emerge (to use Santow J’s words), the case has not been made out.”

[20]    The principles applicable to the exercise of the discretion under s 440A(2) was also summarised by Greenwood J in Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2009] FCA 452 at [28]:

“The discretion under s 440A(2) is to be exercised having regard to the well known observations of McPherson J (Davies and Pincus JJ concurring) in Creevey v DCT (1996) 19 ACSR 456 (see also Re First Netcom Pty Ltd (2000) 35 ACSR 615, per Santow J) concerning the closely related question of whether the creditors could hope to get more by way of payment of their debts from administration rather than liquidation and whether there is persuasive evidence of assets which if realised under one form of administration rather than the other would produce a larger or accelerated dividend to the creditors. The hope must however be a real and not remote possibility, unclouded by cascading contingencies all of which must fall in before an asset might become available to the creditors as a group. In Creevey, the court discounted a contended claim as a possible asset available to creditors. In that case the foreshadowed claim had not been formulated in any concrete way.”

[21]    In Re Offshore and Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6], Brereton J observed that:

“What is required by s 440A(2) is satisfaction that it is in the interest of the company's creditors for the company to continue under administration, rather than be wound-up, as distinct from satisfaction that it may be so. That reinforces the view that a substantial degree of persuasion that administration rather than liquidation is in the interests of the company's creditors is required to invoke the section.”

Leave to appeal from that decision was refused in Offshore and Ocean Engineering Pty Ltd v Greenwich Contractors Pty Ltd [2012] NSWCA 371, where Campbell JA also noted at [16] that it is “of general public importance that the Court system can provide remedies concerning unpaid debts with speed and certainty”, although there is a public policy in the provisions of the Corporations Act concerning administration that creditors be given the opportunity to consider a DOCA when it appears that creditors will do better under a DOCA than under a liquidation.”

29    Those principles indicate that in order to exercise the discretion under s 440A(2), the Court should receive persuasive evidence and be satisfied that there is a sufficient possibility, as distinct from mere optimistic speculation, that the creditor’s interest will be accommodated to a greater degree in administration, rather than in a winding up.

30    For the reasons I have outlined, the evidence presently before the Court does not allow that degree of persuasion. Accordingly, if the applications are considered solely under s 440A(2), I would not consider it appropriate to adjourn the winding up hearing.

31    Looking at the matter more broadly under s 467(1), given the shortness of the time during which the administrators have been appointed, I am still not satisfied that it would be appropriate to grant the adjournment application. It is obvious that the two companies are insolvent, and insolvent to a significant extent. It is also pertinent that the DCT, who appears to be a principal creditor in relation to each company, opposes the adjournment and seeks the winding up of both.

32    There is in addition the circumstance that Radin Legal is an incorporated legal practice and, as required by cl 18(1) of Sch 1 to the Legal Practitioners Act 1981 (SA), it must have at least one legal practitioner director. There was no suggestion that either of the appointed administrators is a legal practitioner. Accordingly, Radin Legal’s appointment of administrators yesterday means that the sole director, Mr Radin, no longer has control of the company, and would not, during the period of any adjournment, have control of the company.

33    Looked at, overall, it is not possible for the Court to be satisfied that an adjournment is likely to be of any practical utility and, as Mr Clarke for the Law Society has pointed out, is likely to involve the incurring of additional, significant expense.

34    For those reasons, I am not satisfied that it is not appropriate to grant the application for adjournment, and that application is refused.

35    The same matters indicate that it is appropriate for winding up orders to be made. I will make consequential orders to give effect to this decision.

Associate:

Dated:    4 October 2017