FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation, in the matter of KJ Consulting Pty Limited (Administrators Appointed) (ACN 081 729 768) v KJ Consulting Pty Limited (Administrators Appointed) (ACN 081 729 768) [2005] FCA 1827 CORPORATIONS – insolvency – application for adjournment of a proceeding for winding up a company in administration in order to hold second meeting of creditors – adjournment refused Corporations Act 2001 (Cth), s 440A(2) Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 applied Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377cited Deputy Commissioner of Taxation v DPS Technology Pty Ltd (2003) 230 LSJS 53 cited Deputy Commissioner of Taxation v First Netcom Pty Ltd (2000) 35 ACSR 615 cited TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830cited IN THE MATTER OF KJ CONSULTING PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 081 729 768) DEPUTY COMMISSIONER OF TAXATION v KJ CONSULTING PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 081 729 768) NSD 1518 OF 2005 GYLES J 15 NOVEMBER 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1518 OF 2005 IN THE MATTER OF KJ CONSULTING PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 081 729 768) BETWEEN: DEPUTY COMMISSIONER OF TAXATION PLAINTIFF (APPLICANT) AND: KJ CONSULTING PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 081 729 768) DEFENDANT (RESPONDENT) JUDGE: GYLES J DATE OF ORDER: 15 NOVEMBER 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application for adjournment be dismissed. 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 1518 OF 2005 IN THE MATTER OF KJ CONSULTING PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 081 729 768) BETWEEN: DEPUTY COMMISSIONER OF TAXATION PLAINTIFF (APPLICANT) AND: KJ CONSULTING PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 081 729 768) DEFENDANT (RESPONDENT) JUDGE: GYLES J DATE: 15 NOVEMBER 2005 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application to wind up KJ Consulting Pty Ltd (Administrator Appointed) (ACN 081 729 768) which was listed for hearing before the Court last Friday, 11 November 2005. The matter was referred to me as the Corporations Duty Judge. The company sought an adjournment of the proceeding for winding up because of the impending second meeting of creditors under the administration to be held tomorrow, 16 November 2005, where approval of a deed of company arrangement is proposed. Thus, in effect, the application for adjournment was governed by s 440A(2) of the Corporations Act 2001 (Cth). 2 The material which was then available to the solicitor acting for the company was sparse and was not in my opinion sufficient to justify an adjournment. However, bearing in mind the importance of the issue to all concerned, including the creditors, it seemed to me appropriate to adjourn the matter until today to enable any available evidence to be obtained and to enable more considered argument to be addressed on both sides. As a result, three affidavits were filed and have been read in relation to the application for adjournment; one by the administrator and two by those closely connected with the company, both being directors and secretaries of that company. 3 Because of the time of day and the impending meeting, it is necessary that I form a judgment as to the result and express reasons for it immediately. Whilst there is something to be said for both sides of the argument, and the matter is not without its complications, I have come to the conclusion that this is not a case in which I can 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. 4 The factors in favour of adjournment are, firstly, that it would enable the general body of creditors to exercise commercial judgment as to where the best interests of creditors lie. As will appear later, that is not entitled to as much consideration in this case as it often would be. The second factor is that some of the related parties will promise to contribute an amount of $75,000 to what might be called the creditors' pool, a contribution which will not be available if the company enters liquidation. I note that a letter recently provided by one of the related parties floats yet a further variation of the proposal for consideration. As that is informally brought forward, I do not think I should do more than note that at the moment. Thirdly, and most importantly perhaps, is the opinion of the administrator who is in favour of the deed of company arrangement being entered into, and who is of the opinion that a better result would flow from that course than from liquidation. 5 Against the adjournment a number of factors can be noted. The first is that the company is not trading. It is not a situation in which the company is liable to be revived or its fortunes revived by trading on as such. Next, as is usual in these cases, the insolvency of the company is undoubted. The composition of creditors ultimately seems to me to be the most important circumstance. The two creditors with by far the predominant amount in value, that is the plaintiff, the Deputy Commissioner of Taxation, and a company, KJ Marketing Pty Limited (in liquidation), which is said to be a related party creditor by the administrator, both oppose the adjournment. The other creditors are three trade creditors in modest amounts, two ordinary trade creditors and the third is an accountant who, it is suggested, is an accountant to the company. The balance is made up of related party creditors. 6 A result of the way in which votes are taken in these matters perforce of the regulations could lead to a situation in which the casting vote of the administrator would pass the resolution to approve the deed of company arrangement, notwithstanding the opposition of the two dominant unsecured creditors. That seems to me to be a consideration which reduces the importance which would normally be given to letting creditors form commercial judgments in these matters. It is not at all clear that a vote of that kind could be attacked in any convenient way by the plaintiff in the event that the vote succeeded. 7 I take into account also, with all respect to the administrator's opinion, that it is difficult to see why, in a situation like the present, there is any great advantage or indeed any advantage to an administrator in pursuing the rights of the company against other debtors rather than a liquidator. It is clear enough that the fortunes of this company and its creditors depend upon the enforcement of amounts said to be owing to it by related companies, in particular the Thredbo Valley Lodge. As the solicitor for the plaintiff has put, a liquidator would seem to be in as good a position as the administrator to move quickly and promptly and, indeed, suggests that the make up of the proposed deed of company arrangement does not contemplate such early movement, but rather a moratorium of 18 months. 8 In my view, that leaves consideration of the offer of contribution by related parties. Bearing in mind that the two dominant unsecured creditors do not place any weight upon that, it needs to be scrutinised with some care. In effect, the offer is buying a moratorium against related parties. I cannot be satisfied that giving a moratorium to those companies will, indeed, increase the chances of recovery. For all I know it may mean that those companies will be given leeway to avoid responsibilities. 9 Lastly, one other factor needs always to be weighed in the scales in these matters. There is no doubt that a liquidator has more ability to follow potential breaches of the law by those concerned with the companies than do administrators. Whilst the administrator does not point to any particular remedy which might be appropriate or open, with so many related party transactions involving a company which is now admittedly insolvent, the possibility of proceedings against related parties for breaches of the law is by no means an absurd possibility. 10 So, taking all of those things into consideration, and whilst recognising the force of the submissions of the solicitor for the company, the application for an adjournment is refused. In coming to that conclusion I have read the cases which have been referred to me of TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830, which contains a valuable discussion and analysis by Hamilton J; Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377, a decision of Campbell J; Deputy Commissioner of Taxation v First Netcom Pty Ltd (2000) 35 ACSR 615, a decision of Santow J; and the most recent decision being that of Deputy Commissioner of Taxation v DPS Technology Pty Ltd (2003) 230 LSJS 53, a decision of Master Burley. All of them recognise that a principal authority in the field is Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 which stresses the need for the Court to be actually satisfied, positively satisfied, of the interests of creditors in matters of this kind. 11 The application for adjournment having been refused, I am satisfied by the note I have been provided by the solicitor for the plaintiff that a case has been made for winding up of the company. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles. Associate: Dated: 15 December 2005 Solicitor for the Plaintiff (Applicant): C Bavin, Hunt & Hunt Lawyers Solicitor for the Defendant (Respondent): E Oliveri, Oliveri Attorneys Date of Hearing: 15 November 2005 Date of Judgment: 15 November 2005