JUDGMENT NO. ou 23 veel oo ties CATCHWORDS CORPORATIONS - deed of company arrangement - whether inconsistent with s.221P ot the Income Tax Assessment Act 1936 - whether the deed comphed with s.444A(4) ot the Corporations Law - whether the deed should be terminated. INCOME TAX - deductions by a group employer - operation of s.221P of the Income Tax Assessment Act 1936. Corporations Law - 3s.444A(4), 435A, 556 Income Tax Assessment Act 1936 (Cth) - s.221P Re Bnan Cassidy Electrical Industries Pty Limited (1984) 9 ACLR 140 Commussioner of Taxation v B & G Plant Hire Pty Limited (unreported, 12 August 1994, Gummow J) COMMISSIONE QE TAXATION ND__TH OMMONWEALTH __ OF AUSTRALIA v ALL SUBURBS CAR REPAIRS PTY LIMITED and BRIAN RAYMOND SILVIA No. G 3176 of 1994 Davies J Sydney 11 October 1994 RECEiv' 14 OCT 1994 FEDERAL COURT AUSTRALIA. PRINCIPAL 4 EGISTRY " IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No G 3176 ot 1994 ) ) GENERAL DIVISION BETWEEN: COMMISSIONER _OF_ TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant AND: ALL SUBURBS CAR REPAIRS PTY LIMITED First Respondent BRIAN RAYMOND SILVIA Second Respondent Coram: Davies J. Date: 11 October 1994 Place. Sydney MINUTES OF ORDER THE COURT ORDERS THAT:- 1, The Deed of Company Arrangement dated 28 February 1994 entered ito by the first respondent, All Suburbs Car Repairs Pty Ltd, be terminated w The applicant's costs be paid by the respondents out of the assets ot the first respondent. NOTE: Settlement and entry of orders 15 dealt with in Order 36 ot the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No G 3176 of 1994 ) GENERAL DIVISION ) BETWEEN: COMMISSIONER OF _T. TION QF THE COMMONWEALTH OF AUSTRALIA Applicant AND: ALL_ SUBURBS CAR REPAIRS PTY LIMITED First Respondent BRIAN RAYMOND SILVIA Second Respondent Coram: Davies J Date: 11 October 1994 Place' Sydney REASONS FOR DECISION This appheation, brought under s.445D ot the Corporations Law, seeks an order terminating a deed ot company arrangement entered into with respect to All Suburbs Car Repairs Pty Limited. All Suburbs Car Repairs Pty Limited ("All Suburbs") was incorporated in 1988 to take over the smash repair business tormerly conducted by Mr & Mrs Brian Cooke. All Suburbs commenced trading in the second halt ot 1988 Save in the year ot income ended 30 June 1993, the company consistently incurred trading losses. On 18 January 1994, proceedings were commenced in the Equity Division of the Supreme Court of New South Wales seeking an order that the company be wound up. On 1 February 1994, the second respondent, Mr B R Silvia, was appointed admunistrator ot All Suburbs By that time, substantial debts had been mcurred. A sum of $92,316 was due in respect of unremitted group tax tor the months of July 1991 to January 1993. There were priority payments due to employees of $14,536. Moneys due to unrelated creditors totalled $328,289. Moneys due on loans trom shareholders amounted to $325,580 And a small amount was due under lease liabilities. The company's assets were modest. The total deticiency was estimated at over $650,000. On 21 February 1994, Messrs Gray E:sdell Timms Pty Ltd, auctioneers and valuers, reported to Mr Silvia that the value of the business of All Suburbs was $77,930 if sold as a going concern and $47,300 if sold at auction under forced sale conditions On 28 February 1994, Mr Silvia sold the business as a going concern to All Suburbs Smash Repairs Pty Ltd, a company associated with the directors and shareholders ot All Suburbs The total consideration was roughly equivalent to the auction value as estimated by Gray E:sdell Timms Pty Ltd. The purchase price was $29,700, The purchaser also assumed all the lability of the vendor tor employee entitlements and agreed to pay for work in progress at cost plus estimated profit. On 28 February 1994, Mr Silvia entered into an agreement ("the directors' deed") with the directors and shareholders ot All Suburbs under which Mr Silvia was requested to propound a deed of arrangement tor All Suburbs. The deed rectted:- "The Related Parties have requested the Administrator to propound a Deed of Company Arrangement based upon (4) the Australian Taxation Olfice being paid all of the proceeds of the sale of the Company's assets in respect of priority unpaid Group Tax, and (b) the creditors of the Company (excluding all of the Related Parties of the Company) being paid a first and final dividend in respect of their debts out of funds to be advanced by the Related Parties to the Administrator" The directors and shareholders agreed to advance moneys to Mr Silvia to defray costs of continuing the business and two turther sums totalling $30,000, which were to be available tor the payment of the administrator's costs and tor payment to unsecured creditors under the deed of arrangement In addition, two of the directors, Mr & Mrs Cooke, agreed to sell their home and to provide to Mr Silvia a maximum ot $65,000 and a minimum of $40,000 tor distribution to ordinary creditors. On 2] February 1994. Mr Silvia wrote to all creditors. He reported on the attairs of the company and proposed a deed of company arrangement. Relevant terms of the deed were - "3 (a) The Company shall make avatlable to the Administrator all of the assets Of the Company (hereinatter called 'the Liquidation Fund') for the purposes of this Deed (hy The Directors shall make available to the Administrator the funds speciied in the Directors Deed (hereimafter called 'the Director's Fund') being an amount of not less than $70,000 and not more than $95 000.00, 4 The Liquidation Fund shall be paid firsdy im respect of Priority Unpaid Group Tay and then in accordance with Section 556 of the Corporations Law (except to the extent that the Administrator's costs and expenses will not be nm paid out of this Fund), rf any part of the Liquidation Fund remains it shall be distributed in accordance with Clause 5 hereof (4) (b) The Directors' Fund shall be distributed by the Administrator by way ofa first and final dividend as follows firstly priority payments pursuant to Section 556 as if the Company was in liquidation together with such other Admunistrator's Costs as are not d priority payment to Section 556 secondly the balance then remaining pro rata amongst all Participating Creditors whose debts are to be calculated by the Administrator as if the Company was bemg wound up with the winding up commencing on the date specified in Paragraph (1) of Schedule B hereto No part of the Fund ts to be distributed to the Non-Partcipating Creditors and this Deed shall not, apart from Paragraph 7 of Schedule A hereto, be a bar to the Non-Participaling Creditors recovering or seeking to recover their debts from the Company after this Deed 1s terminated This Deed shall terminate (a) (b) (c) (d) tollowing provisions: in the circumstances provided for m Sections 445C, 445D and 445F, or as provided in Paragraphs 3 and 12 of Schedule A hereto, or the Administrator determining that there has been a breach of the Directors' Deed which ts not capable of being remedied within a reasonable ume or at all, or the Sale Agreement not being completed " Note the reference in cl 3(a) to "the Liquidation Fund", comprising the existing assets ot the company. and the reference in cl 3(b) to "the Directors' Fund", being the sums to be received under the directors' deed The deed of arrangement also incorporated the provisions of Schedule 8A of the Corporations Regulations which included the In exercising the powers conferred by this deed and carrying out the duties arising under this deed, the admintstrator is taken to act as agent for and on behall of the company § 40 The administrator must apply the property of the company coming under his or her control under this deed in the order of priomty specified in section 556 of the Corporations Law 5 The creditors must accept ther enuulements under this deed in full satisfaction and complete discharge of all debts or claims which they have or claim to have against the Company as at the day when the administration began and each of them will, if called upon to do so, execute and deliver to the company such forms of release of any such claim as the administrator requires " As the shareholders agreed to torego their rights as creditors to participate in the distribution under the deed of arrangement, Mr Silvia reported to the creditors that. in his view, the Liquidation Fund would be used wholly in payment to the Commissioner of Taxation in respect of his priority debt and that the unsecured creditors, including the Commissioner ot Taxation in respect of the balance owing to him, would receive a dividend trom the Director's Fund of between 12 to 20 cents in the dollar, depending upon the amount ultimately realised from the sale of the Cookes' property At a meeting of the creditors of All Suburbs held on 28 February 1994, the scheme ot arrangement was considered. By majority, the creditors voted that All Suburbs execute a deed of company arrangement. The Commussioner of Taxation was part of the minority voting against the resolution. The deed was executed on the same day I shall deal first with some particular objections to the deed of arrangement which have been raised by counsel tor the Commissioner otf Taxation. Section 444A(4) of the Corporations Law provides, inter alia:- "The instrument must also specify the following (b) the property of the company (whether or not already owned by the company when tt executes the deed) that 15 to be available to pay creditors' claims; (g) the circumstances in which the deed terminates, Counsel tor the Commissioner submitted that, when m paragraph 3(a) the deed reters to "all of the assets of the Company', it tails to specity the property of the company that 1s to be available to pay creditors' claims, as required by s.444A(4)(b) of the Corporations Law. Counsel submitted that that provision requires particularity in the description of the assets that are to be available to pay the creditors' claims. In my opinion, however, a deed of company arrangement may use an expression such as "all ot the assets of the Company". A deed of arrangement 1s not a report to the shareholders on the company's attairs. The present deed sufficiently describes the property that was coming directly from the company's assets, namely all ot the assets, and the property coming trom the directors and shareholders which, together, would be used to pay the creditors' claims. Counsel tor the Commissioner submitted that there was insutficient description of the circumstances in which the deed would terminate, as cl 6(c) refers to the directors' deed and cl 6(d) reters to "the Sale Agreement". Counsel submitted that there was a tallure to specify the circumstances in which termination might be ettected because the provisions of the directors' deed and those of the Sale Agreement are not set out in the deed of arrangement or in a document annexed to it. In my opinion, a deed of arrangement may reter to another agreement and may stipulate a breach of that agreement as an occasion of the termination of the deed provided that no uncertainty results therefrom. It 1s obviously desirable to identity clearly any such agreement and the breaches reterred to. In this respect the deed of arrangement could have been drafted with more care. However, the creditors would have understood the ettect ot cl 6(c) and cl 6(d). They were not left in doubt. There Ig nO cause tor terminating the deed on this ground. Counsel has submitted that | should act m accordance with the judgment of McClelland J. in Re Brian Cassidy Electrical Industries Pty Limited (1984) 9 ACLR 140 in which his Honour retused to approve a scheme of arrangement on the ground that the tailure of the company at the expense of outsiders dealing with it called for a thorough investigation in a winding up. The principle which his Honour apphed has been given ettect on many occasions in the bankruptcy jurisdiction of this Court when schemes ot arrangement have been set aside in the public interest. However, there 1s nothing in the tacts betore the Court which suggests that All Suburbs tailed tor any reason other than poor management. There are accounts in evidence which indicate that the proper accounts were kept. Nothing appears in those accounts to show that the losses occurred other than through the carrying on of the ordinary business ot the company 'There is no suggestion that undue amounts were paid to directors And the report to the creditors discloses that the shareholders put in substantial funds of their own in an attempt to overcome the trading losses. In these circumstances, there would be no public interest in an investigation into the attairs of the company and its management. Rather the element of public interest to be applied 1s that set out in s.435A of the Corporations Law which provides:- "The object of this Part 1s to provide tor the business, property and affairs of an insolvent company to be administered in 4 way that (a) (b) maximises the chances of the company, or as much as possible of its business, continuing in existence, or fil is not possible tor the company or ils business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company " I now turn to the principal issue in the case Section 221P of the Income Tax Assessment Act 1936 (Cth), which concerns deductions made by a group employer on or betore 31 May 1993, provides inter alia:- "221P(1) Where an employer makes a deduction for the purposes of this Division, or purporting to be for those purposes, from the salary or wages paid to an employee and refuses or fails to deal with the amount so deducted in the manner required by this Division, or to affix tax stamps of a face value equal to the amount of the deduction as required by this Division, as the case may be, he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustce shall be lable, to pay that amount to the Commissioner " This section is a specitic provision ot the Commonwealth Parliament which ditfers trom the general provisions as to prionty contained in 5.556 of the Corporations Law. In Commissioner of Taxation v. B_& G. Plant Hire Pty Limited (unreported, 12 August 1994), Gummow J held that the general provisions of the Corporations Law do not operate on the subject matter of s.221P so as to contradict, by implication, that specific provision. His Honour concluded:- "The general provision in para 444A (4) (h) of the Corporations Law to the effect that the instrument prepared by the administrators must specify the order of distribution among creditors bound by the Deed 1s subject to the qualification that this order must not derogate from that mandated by s 221P of the Tax Act Further, the hability to the Commissioner which arises under $ 221P 1s not, against his will, to be overridden by a provision inserted pursuant to para 444A (4) (h) To the extent that such 4 contrary provision 1s inserted, then despite the general terms of s 444D, the deed of arrangement does not bind the Commussioner as a creditor, nor may steps taken under the Deed operate to release the liability to the Commissioner * Counsel tor All Suburbs and Mr Silvia have submitted, however, that the tacts of the present case are distinguishable trom those considered in Commissioner of Taxation v. B_& G. Plant Hire Pty Limited In that case, the moneys which were to be distributed to the creditors were to come entirely from the assets of the company and not trom tunds contributed by other parties. Counsel for the respondents submitted that, in the present case, the scheme of arrangement gives to the Commissioner ot Taxation the priority to which the Commissioner would be entitled on a winding up. That is because the scheme of arrangement provides that all of those assets which would be assets of the company in a liquidation are to be placed in a fund called "the Liquidation Fund", and this tund 1s to be paid first in respect of the unpaid group tax. Counsel tor the respondents therefore submitted that the Commisstoner will obtain under the scheme ot arrangement all that he could obtain under a liquidation. Counsel turther submitted that the Commissioner will be somewhat better off because, atter the Commissioner has received the total of the moneys in the Liquidation Fund, the balance due to him will rank pari passu with other debts tor distribution out ot the Directors' Fund. This submission tails when the matter 1s analysed as a matter of law, whatever may be the position in tact, as to which T draw no conclusion. The directors' deed was made between the shareholders and Mr Silvia in his capacity as administrator of All Suburbs. Accordingly, the deed provided tor the payment of moneys to Mr Silvia in his capacity as administrator ot and agent of that company. The deed of arrangement was not inconsistent with this That deed described Mr Silvia as "the Administrator" and recited that he was appointed administrator of the company on 1 February, 1994 Clause 1 of Schedule 8A, which was incorporated, provided that, in exercising the powers conterred by the deed and in carrying out the duties under the deed, the administrator was taken to act as agent for and on behalf of the company. That ts indeed the usual practice, tor s 444A(2) of the Corporations Law provides that the administrator ot the company ts to be the administrator of the deed, unless the creditors resolve to appoint someone else to be the administrator of the deed. It tollows, in my opinion, that, when the directors and shareholders agreed to pay sums to Mr Silvia in his capacity as administrator, they agreed to pay those sums to him in his capacity as agent tor All Suburbs and, consequently, that the sums when paid would be recerved by him on behalt of the company. It necessarily follows that the sums when received would be property ot All Suburbs. This also accords with the ordinary operation ot company schemes of arrangement. Thus, when s.444A(4)(b) provides that the deed must specify "the property of the company (whether or not already owned by the company when it executes the deed) that 1s to be available to pay creditors' claims", it contemplates that sums may be paid by third parties for distribution to creditors and that those sums will be property of the company available to pay creditors' claims. Thus, the subject deed of arrangement provided tor the distribution of the moneys and property held by the company prior to entry into the deed of arrangement and also ot moneys of the company constituted by the contributions to be made by the directors and shareholders under the directors' deed. In respect of that total property, the deed of arrangement made a provision tor distribution which was inconsistent with $.221P ot the Income Tax Assessment Act. For the reasons given by Gummow J, the Commissioner of Taxation 1s not bound by this provision and the deed should accordingly be set aside. I apply the reasoning ot Gummow J, notwithstanding the difference in the tacts of Commussioner ot Taxation v B & G Plant Hire Pty Limited and those of the present case. In accordance with reg. 53A.07(1), when the Court makes the order under s.445D ot the Corporations Law terminating the deed of arrangement, All Suburbs will be taken to have passed a special resolution under s.491 of the Corporations Law that the company be wound up voluntarily. I shall order that the costs of the applicant, the Commissioner of Taxation, be paid out of the assets of the respondent, All Suburbs Car Repairs Pty Limited. I certity that this and the 11 preceding pages are a true copy of the reasons tor judgment herein of the Honourable Mr Justice Davies. Associate: Date: 11 October 1994 ' Counsel for the applicant Solicitor for the applicant: Solicitors tor the 1st & 2nd respondents: Date of hearing: Date ot judgment: Mr S McMillan Australian Government Solicitor Mr P. Fordyce ot P.A. Somerset & Co. 5 August 1994 11 October 1994