Federal Court of Australia

Deputy Commissioner of Taxation v Prism Contracting & Consulting Pty Ltd [2024] FCA 688

ORDERS

THE COURT ORDERS THAT:

1.    There be no order on paragraph 1 of the defendant’s interlocutory application filed 27 May 2024, but that part of the application is not dismissed at this time and the defendant may renew its application for a stay upon filing further evidence in support of the order sought in paragraph 2 of the application.

2.    Otherwise, paragraph 1 of the interlocutory application be adjourned to 6 June 2024 before the Corporations List judge.

3.    The costs of today be reserved.

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

REASONS FOR JUDGMENT

REVISED FROM TRANSCRIPT

FEUTRILL J:

1    This is an interlocutory application for review of a Registrar's orders that the relevant company be wound up in insolvency under s 35A(5) of the Federal Court of Australia Act 1976 (Cth).  

2    It also contains an application for an urgent stay of that order under s 35A(6) of the Federal Court Act. The Deputy Commissioner of Taxation served a creditor's statutory demand dated 28 August 2023 on the company pursuant to s 459E of the Corporations Act 2001 (Cth), in which the Commissioner stated that the company was indebted to him in the sum of $433,694.48. The statutory demand was not set aside or paid within the statutory period. On 21 November 2023 the Commissioner applied under s 459A and s 459P for an order winding up the company in insolvency, relying on the presumption of insolvency in s 459C(2)(a), namely, failure to comply with the statutory demand.

3    That application was initially listed for hearing on 30 January 2024. The company opposed the application on the ground that it was solvent. Having regard to the presumption of insolvency, the company has an onus of positively proving its solvency as a ground for the Court to refuse an order to wind up the company. It appears that the application was adjourned a number of times before being listed for hearing on 7 May 2024 before a Registrar of the Court. On the day of that hearing, the company filed an affidavit of Ms Karen Kelly affirmed that day. Ms Kelly deposed that she is a certified practising accountant and after performing a preliminary review, she formed the view that the company was solvent based on a limited review of the accountant's books and records of the company. She also sought until 13 May 2024 to complete a review and report.  

4    The company requested an adjournment of the hearing until at least 13 May 2024. The Registrar refused the extension of time and proceeded to hear the application. It appears from the transcript that the adjournment was refused because an application for a company to be wound-up in insolvency is to be determined under s 459R within six months from the day of the application, and that period was due to expire on 21 May 2024. Due to the availability of the Registrar, and possibly other members of the Court, it could not be heard before that date. It appears that consideration was given to the Court's power to extend the period prescribed by s 459R, but the Registrar was not satisfied that it was in the interests of justice to do so on the information before her. The Registrar then proceeded to hear the application and made the orders to which reference has been made.

5    There was no evident dispute about the applicable principles on an application of this nature. It is clear that the Court has power under either s 23 or s 35A(6) of the Federal Court Act to grant a stay of the order of the Registrar. The applicable principles were set out in HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638; (2002) 44 ACSR 169 (French J) as follows:

[48]    The grant of a stay under ss 35A(6) or 23 is a matter for the discretion of the court in the light of all the circumstances of the case. There is no rule confining the exercise of that discretion which requires special reasons to be shown for its exercise. In the statutory context of Pt 5.4 of the Corporations Act however, the power is to be exercised with caution so as not unduly to delay the liquidator or hinder his or her capacity to carry out the duties imposed by the statute. There is therefore a clear onus on the applicant to make out a positive case: Re Warbler Pty Ltd (1982) 6 ACLR 526 at 530; 1 ACLC 323 at 328.

[49]    In addition to the general considerations which enjoin caution in the making of such orders, there are specific considerations relevant to the present class of case including:

(a)    any detriment or risk of detriment to creditors or contributories flowing from a stay;

(b)    the merits of the proposed review;

(c)    the current trading position and solvency of the company;

(d)    the prejudice to the company if a stay is not granted;

(e)    the legislative policy against delay to the liquidation process.

See also Mutton v Living Australia Pty Ltd [2019] FCA 1051; (2019) 136 ACSR 644 at [13] – [15].

6    The interests of the creditors and contributories, the solvency of the company and the merits of the company's application for review are necessarily linked in determining whether a stay should be granted, and in this case, the merits must be considered in the context in which there was a failure to comply with a statutory demand, and as a consequence, there is a presumption of insolvency. The affidavit of Ms Kelly to which I have made reference earlier largely expresses a preliminary view based on limited information, and on the face of it, is not sufficient to displace the presumption of insolvency. Section 95A of the Act provides:

95A    Meaning of solvent and insolvent

(1)    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.

(2)    A person who is not solvent is insolvent.

7    That is, in effect, the Act is concerned with ‘cash flow’ solvency. The evidence currently before the Court does not identify any source of funding from credit or from the director or shareholder with respect to the company. The director, Mr Peter Matthiessen, intends to provide an undertaking to the Court to the effect that if a stay were to be granted, he would not cause the company to dispose of its assets or incur any liabilities, other than on an arm's length's basis in the ordinary course of the company's business, and to fund the company's review application. The director has also already given an undertaking to indemnify the company against the costs of the review.

8    As I have said, unless the review is undertaken on an expedited basis, if the company is presently solvent, it may well be tipped into insolvency or significant financial hardship through loss of confidence in its ability to continue trading, and I accept that there will be significant consequences if a stay is not granted for the company, its employees and its shareholders and potentially creditors. Mr Matthiessen has filed a number of affidavits in support of the application. The principal affidavit sets out part of the financial position of the company, but those parts of the affidavit that deal with expected revenue are not entirely clear regarding the present debts owed to the company as likely future revenue.

9    It would appear these are largely forecasts based on continuing the current contracts the company has made with third parties to completion, and the surplus of the revenue less the estimated costs of completing those contracts. There is an estimate, in paragraph 23 of Mr Matthiessen’s affidavit of 27 May 2024, that the surplus would be at some point in the future $428,367.88. He also deposes to existing debtors in a total sum of $398,667.98. There is not a great deal of information in his affidavit concerning the company's creditors. However, there is an affidavit before the Court of one of the liquidators, Mr Jeremy Nipps, who has expressed the view that creditors, excluding the Commissioner, amount to $1,122,476.

10    In addition to that, there is evidence before the Court of present debts owed to the Commissioner, or the Australian Taxation Office, on the integrated client account of $658,413.89, and a super guarantee of $265,317.46. This brings the total amount owed to creditors to $2,046,207.35. Therefore, on the affidavit material available at this time, there appears to be a significant deficit of creditors over debtors of the company. I also have before me tax returns for the financial years 30 June 2022 and 30 June 2023, which show loses, respectively, of $271,180 and $660,866 in those financial years. They, of course, do not necessarily indicate that this financial year will be of a similar nature, but they are an indication that the financial performance of the company up to shortly before the statutory demand was issued was not encouraging.

11    Returning to the chronology, as I mentioned, the originating application was filed on 21 November 2023, and as of 7 May 2024, which is just short of six months later, the company had not been able to produce evidence of an expert nature identifying the grounds upon which it is said the company is solvent. It is now said that with a short extension to 7 June 2024, a report of that nature will be forthcoming. 

12    While I do not consider it to be a fanciful prospect that the company will be able to demonstrate its solvency on review, on the current state of the evidence, I am not satisfied that that prospect is particularly strong. That may well change if Ms Kelly produces a report of the kind foreshadowed, and at that time, I would envisage that the application could be renewed. As I mentioned during the course of the hearing, the matter has been listed for hearing in the General Corporations List on 6 June 2024. I will not preclude the company from renewing its application once it has obtained a report from an expert, but that would be a matter for the judge to whom the review is, ultimately, docketed.

13    The orders I will make on the application at present are that:

Associate:

Dated:    26 June 2024