Deputy Commissioner of Taxation, in the Matter of Henry Plant and Equipment Hire Pty Limited v Henry Plant and Equipment Hire Pty Limited [2005] FCA 1464

FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation, in the Matter of Henry Plant and Equipment Hire Pty Limited v Henry Plant and Equipment Hire Pty Limited [2005] FCA 1464

CORPORATIONS – meeting of creditors called to consider a Deed of Company Arrangement; whether administration process should be allowed to run its course and winding-up application adjourned

Corporations Act 2001 (Cth) s440A(2) IN THE MATTER OF HENRY PLANT AND EQUIPMENT HIRE PTY LIMITED ACN 058 331 516; DEPUTY COMMISSIONER OF TAXATION v HENRY PLANT AND EQUIPMENT HIRE PTY LIMITED NSD 906 OF 2005 GRAHAM J 5 OCTOBER 2005 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 906 OF 2005

IN THE MATTER OF HENRY PLANT AND EQUIPMENT HIRE PTY LIMITED ACN 058 331 516

BETWEEN: DEPUTY COMMISSIONER OF TAXATION

PLAINTIFF

AND: HENRY PLANT AND EQUIPMENT HIRE PTY LIMITED

DEFENDANT

JUDGE: GRAHAM J

DATE OF ORDER: 5 OCTOBER 2005

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: 1. The application for a winding-up order be adjourned until 9.30 am on Monday 10 October 2005. 2. The costs of the Plaintiff/Respondent to the Motion be the Plaintff's costs in the winding-up application. 3. Otherwise no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 906 OF 2005

IN THE MATTER OF HENRY PLANT AND EQUIPMENT HIRE PTY LIMITED ACN 058 331 516

BETWEEN: DEPUTY COMMISSIONER OF TAXATION

PLAINTIFF

AND: HENRY PLANT AND EQUIPMENT HIRE PTY LIMITED

DEFENDANT

JUDGE: GRAHAM J

DATE: 5 OCTOBER 2005

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The Deputy Commissioner of Taxation ("The Deputy Commissioner") is the Plaintiff in these proceedings, which were commenced on 6 June 2005, in which an order is sought that the Defendant Henry Plant and Equipment Hire Pty Ltd be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) ["the Act"]. 2 The Deputy Commissioner claims to have standing to seek such relief under section 459P(1)(b) of the Act. He seeks the relief in question pursuant to section 459A of the Act, relying upon presumed insolvency of the company under section 459C following the service upon the company of a statutory demand under section 459E on 21 March 2005. The Deputy Commissioner claims that an amount of $1,067,233.24 is owing by the company to it. 3 The application for the winding up order was due to be heard by the Court on 9 September 2005. It is said by the company that in the preceding week it had been endeavouring to procure finance for a reconstruction of the company, but that finance fell through at the last minute. In the circumstances, on the morning of 9 September the company's directors passed a resolution under section 436A(1) of the Act appointing an administrator of the company. The administrator so appointed was Mr Ronald John Dean-Willcocks of the firm Star Dean Willcocks. 4 When the winding up application came before the court on 9 September orders were made by consent for the adjournment of that application to 27 September 2005. On that day further orders were made by Conti J for the adjournment of the application for an order to wind up the company to today. 5 A formal notice of motion pursuant to section 440A(2) of the Act was handed up in Court on 27 September, with a copy being filed in the Registry on 28 September. That notice of motion, which is before me today, seeks an order pursuant to section 440A that the application of the Deputy Commissioner to wind up the company be adjourned "until further order of the court". 6 Mr Stowe of counsel, who appears for the Applicant company on the hearing of the motion, has indicated that an adjournment is sought until 7.00 pm on Friday, 7 October 2005. After discussion with Mr Iuliano of counsel, who appears for the Deputy Commissioner, it was agreed that the application before me should be treated as one for an adjournment of the Deputy Commissioner's application for an order to wind up the company until 9.30 am on Monday 10 October. 7 In circumstances where an administrator is appointed to a company, it is incumbent upon the administrator to convene a meeting of the company's creditors within the convening period, which is defined in section 439A(5) of the Act. 8 Under section 439A(2) of the Act the requisite meeting must be held within five business days after the end of the convening period. Section 439A(6) empowers the Court to extend the convening period in certain circumstances which are not presently relevant. The convening period expired on 30 September 2005 and the five business days permitted under section 439A(2) of the Act would allow the requisite meeting to be held on Friday 7 October 2005. Notice of meeting dated 27 September 2005 is in evidence calling a meeting of the company's creditors for Friday 7 October 2005 at 10.00 am at the Lithgow Workmen's Club in Lithgow. 9 Section 439A(4) requires the notice of meeting to be accompanied by a report by the administrator about the company's business, property, affairs and financial circumstances; a statement setting out the administrator's opinion about each of certain matters and his reasons for those opinions and, if a deed of company arrangement is proposed, a statement setting out details of the proposed deed. 10 At the meeting so convened the creditors may, pursuant to section 439C of the Act, resolve that the company execute a deed of company arrangement, or that the administration should end, or that the company be wound up. 11 Section 440A(2) of the Act provides: '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." 12 Mr Deane-Willcocks has sworn two affidavits, one on 21 September 2005 and the other on 5 October 2005. Mr Deane-Willcocks in his report to creditors of 27 September 2005 suggested that if the company proceeds into liquidation at the present time there will be a dividend payable to ordinary unsecured creditors of approximately 22.7 cents in the dollar. On the premise that this amount will be payable in approximately nine months time, it is said that the present-day value of the likely dividend is 21.38 cents in the dollar. 13 A deed of company arrangement has been proposed, which is referred to in Mr Dean‑Willcocks' report. That deed contemplates that the company will continue to trade at least through to 30 June 2007. If the company continues to trade it will supposedly generate profits in the period ending 30 June 2006 of $232,105 and in the following financial year of $513,217. It is suggested that starting with an opening bank balance of zero the company will trade cashflow positive for the two years ended 30 June 2006 and 30 June 2007, it being indicated that there are likely to be negative cashflows in the months of December 2005 and February and June 2006 in the first financial year and negative cashflows in February and June 2007 in the second financial year. 14 Mr Dean-Willcocks in his report has suggested that should the proposed deed complete as contemplated then ordinary unsecured creditors will end up receiving a dividend of approximately 50 cents in the dollar in three instalments in July 2007 (16.8 cents in the dollar), July 2008 (19.6 cents in the dollar) and November 2008 (13.6 cents in the dollar) dependent upon the extent of creditor claims. It is suggested that the current value of dividends under the deed totalling 50 cents in the dollar would be 40.68 cents in the dollar. That is significantly better than a dividend of 21.38 cents in current dollars were the company to be wound up. 15 In his report to creditors, Mr Dean-Willcocks said: "Subject to the assumptions and qualifications detailed hereunder we are of the opinion that it is in the creditors' interest that the company execute a Deed of Company Arrangement. Creditors should, however, refer to our entire report, particularly sections 4, 5, 6 and 7 hereunder." 16 Mr Dean-Willcocks then proceeded to set out what he described as "primary assumptions and qualifications" which he had made. He continued by saying: "Consequently, it follows that we are of the opinion that the company should not be wound up and that the administration should not end." 17 At the conclusion of his report to creditors he set out a disclaimer reading: "The reports and statements contained in this report and any annexures hereto and the investigation of the company's affairs have been prepared and conducted from the company's books and records and/or from information provided by the company's directors or other representatives and third parties. Our opinions and recommendations are based on the information provided to us. We have not completed an audit nor conducted a comprehensive investigation of the company's financial affairs. We cannot therefore warrant the accuracy, reliability or completeness of the underlying information and our comments and opinions should be considered subject to this limitation." 18 In his affidavit sworn 5 October 2005, Mr Dean-Willcocks concluded as follows: "12. I am strongly of the opinion that it is in the best interests of creditors that the administration is allowed to continue." 19 The Deputy Commissioner did not offer any evidence on the application and indicated that he did not require Mr Dean-Willcocks for cross‑examination. There is scant evidence before me as to compliance by the administrator with the provisions of section 439A(3) of the Act in relation to due advertisement of the meeting of creditors called for Friday next. Mr Dean-Willcocks has sworn: "11. I have convened a meeting of creditors under section 439A of the Corporations Act 2001. ..." 20 This sentence was not objected to by the Deputy Commissioner and would seem to me to provide some support for a submission from the company that the meeting called for Friday next has been duly called in accordance with the Act. 21 It has been said in respect of section 440A(2) that it is a recognition that the administration process has the prospect of being more beneficial to the creditors as a whole than winding up and requires that that administration process be given the opportunity to run its course. It is also said that for relief to be granted under section 440A(2) the company must adduce persuasive evidence that administration would be in the interests of creditors. 22 It seems to me that for present purposes, the issue is whether or not the company should be placed in liquidation today upon a hearing of the Deputy Commissioner's application for a winding up order or whether the creditors should have the opportunity to make the statutory decisions contemplated by section 439C of the Act on Friday. 23 Given that Mr Dean-Willcocks has strongly expressed the opinion that it would be in the best interests of the creditors to allow the administration to continue and that in his report to creditors he has expressed the opinion that it would be in the creditors' interest that the company execute the proposed deed of company arrangement under which it would be able to continue to trade, I am satisfied, prima facie, that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up at this stage. 24 It must be remembered that even if the creditors decide on Friday to execute a deed of company arrangement, such a deed may terminate in a variety of circumstances for which section 445C of the Act provides. As to whether or not the creditors will see fit to adopt Mr Dean-Willcocks' recommendation is a matter upon which I can but speculate at this stage. 25 Mr Iuliano has raised some 11 points as to why Mr Dean-Willcocks' recommendation should be rejected by the creditors and urged that for those reasons I should not be satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. Summarising those points, they are as follows: (1) There is no evidence that due notice of the meeting has been given in accordance with the requirements of section 439A. (2) The accounts attached to Mr Dean-Willcocks' report make inadequate allowance for depreciation of the company's plant and equipment. (3) The sales projections of the company's officers which are set out in the profit and loss projections attached to Mr Dean-Willcocks' report record estimated amounts where the details have been "withheld due to confidentiality". (4) The provision for doubtful debts in the company's projected profit and loss accounts is for bad debts having a value of 1 per cent, whereas in relation to the company's current debtors it is suggested that only 50 per cent of outstanding debts is likely to be recovered. (5) No provision has been made for any cash injection from the directors. (6) The cashflow projections refer to June payments of working capital without specifying where that money is to go or for what purpose. (7) The cashflow projections do not provide for any opening working capital sufficient to indicate an ability to even pay the wages of the 50-odd people employed in the company's business in the first proposed month of trading. (8) The report of Mr Dean-Willcocks to the Australian Securities and Investments Commission suggests that the company has had a deficiency of working capital in every year since 2001. (9) If the company is not to go into liquidation the creditors will be deprived of the opportunity to have the directors examined in relation to the affairs of the company and potentially have access to the assets of the directors. (10) If the company is not to go into liquidation at this stage an opportunity may be lost to the creditors to have unfair preferences set aside. (11) The predictions by Mr Dean-Willcocks as to when the distributions will be made are inconsistent with the projected cashflows which contemplate payments under the deed of company arrangement earlier than mentioned in paragraph 2 of his report to creditors. 26 The Deputy Commissioner urges the view that in these circumstances the creditors should, putting it in the vernacular, "take the 22.7 cents available to them on a winding-up and run". 27 It seems to me that the matters that have been raised by the Deputy Commissioner are matters which would properly be raised by the Deputy Commissioner at the proposed meeting of creditors called for Friday next. It may well be that when they are put to the administrator and the company's directors that appropriate answers will be provided. It may be that some of the matters are unanswerable. These matters are no doubt ones which would be properly taken into account by the creditors in deciding which of the three options available to them under section 439C of the Act should be pursued. 28 In my opinion, in the light of Mr Dean-Willcocks' recommendations, my prima facie satisfaction that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up should stand, notwithstanding the several issues which the Deputy Commissioner has advanced. 29 Accordingly, in my opinion the hearing of the application by the Deputy Commissioner for an order to wind up the company should be adjourned until 9.30am on Monday, 10 October 2005. 30 In relation to costs the Deputy Commissioner's costs of the Motion should be the Deputy Commissioner's costs in the winding-up application. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Graham.