FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v Kelso Builders Supplies Pty Ltd [2006] FCA 777 DEPUTY COMMISSIONER OF TAXATION v KELSO BUILDERS SUPPLIES PTY LTD ACN 022 026 039 NSD1811 OF 2005 EMMETT J 30 MARCH 2006 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD1811 OF 2005 IN THE MATTER OF KELSO BUILDERS SUPPLIES PTY LTD ACN 022 026 039 BETWEEN: DEPUTY COMMISSIONER OF TAXATION PLAINTIFF AND: KELSO BUILDERS SUPPLIES PTY LTD ACN 022 026 039 DEFENDANT JUDGE: EMMETT J DATE OF ORDER: 30 MARCH 2006 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant be wound-up. 2. Mr Steve Sherman of Ferrier Hodgson of 17/2 Market Street Sydney NSW, be appointed as liquidator of the defendant. 3. The plaintiff's costs be paid out of the assets of the defendant 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 NSD1811 OF 2005 IN THE MATTER OF KELSO BUILDERS SUPPLIES PTY LTD ACN 022 026 039 BETWEEN: DEPUTY COMMISSIONER OF TAXATION PLAINTIFF AND: KELSO BUILDERS SUPPLIES PTY LTD ACN 022 026 039 DEFENDANT JUDGE: EMMETT J DATE: 30 MARCH 2006 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiff, the Deputy Commissioner of Taxation ('the Commissioner'), seeks an order for the winding-up of the defendant, Kelso Builders Supplies Pty Limited ('the Company'), on the ground of the insolvency of the Company. The Company is indebted to the Commissioner in the sum of in excess of $360,000 for unpaid tax. There may be some minor dispute as to the precise quantum, but it is not disputed that a sum in excess of $360,000 is owing. 2 The Company's balance sheet, as at 30 June 2005, discloses that it had property, plant and equipment valued in excess of $9 million, current assets of some $7,728,000 and current liabilities of some $3,165,000. It also discloses non-current secured liabilities of $6,485,000. It therefore has net assets according to that balance sheet of $7,100,206. The profit and loss account of the Company for the year ended 30 June 2005 disclosed an operating profit for that year of some $230,000. A profit and loss statement for the period to 30 September 2005 disclosed a net profit of some $286,000. However, it is common ground that on 11 September 2005, a fire at one of the premises owned by the Company at 403 Great Western Highway, Wentworthville, resulted in the total destruction of that building and also the whole of its contents, including the Company's stock. 3 The current assets included some $2,681,000 of stock, which, it is now agreed, has been destroyed. The other significant current assets were unsecured advances of some $4,867,000, being loans made to entities associated with the directors. The Company accepts that there is considerable doubt as to whether those advances are recoverable immediately. It follows, and the company does not dispute the proposition, that the Company is not able to pay all its debts as and when they become due and payable. It is therefore insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) ('the Act'). 4 Accordingly, I am satisfied that the ground of insolvency has been established as a basis for winding-up the Company. In effect, however, the only issue before me is whether the proceedings should be adjourned to enable the company to pursue through the agency of its directors and shareholders an insurance claim in respect of the fire, to which I have already referred. 5 On 27 March 2006, the Company filed a statement of claim in the Supreme Court of New South Wales against QBE Insurance Australia Limited ('QBE') claiming that QBE has failed to indemnify the Company in accordance with various insurance contracts entered into between QBE and the Company. The Company claims the sum of $8,852,500, plus interest in an amount of some $222,000 and accruing. No defence has yet been filed to the statement of claim. However, the Company acknowledges that QBE has denied liability on the ground of arson. They have no evidence one way or the other as to the substance of that defence, or the likelihood of the defence being established. In effect, the Company says that it would be preferable for the company to pursue that litigation whilst still under the control of its directors. 6 I am also informed, although there is no evidence before the Court, that there is in existence a charge over all of the Company's assets to secure loans that were primarily secured on the land owned by the Company. Three of the Company's properties have been sold and realised proceeds less than the book value. It is expected that the fourth property, when sold, will result in a deficiency so far as the secured creditors are concerned. If the secured creditors therefore wish, they would be entitled to assert a claim of priority over the cause of action against QBE. Whether they will do that remains to be seen. 7 There is no reason to suggest that the liquidator proposed by the Commissioner would not take a disinterested and objective approach to the question of whether or not to prosecute the proceeding in the Supreme Court against QBE. It would be open to unsecured creditors, or contributories if it comes to that, to offer to fund the litigation on the basis that some priority would otherwise be available in the winding-up to those who fund the litigation. I am not persuaded that any advantage is to be gained by deferring the winding-up to enable the litigation to be conducted by the directors. It follows, in my view, that any application for an adjournment of the winding-up application should be refused in the circumstances. 8 The Commissioner has established the grounds for the making of a winding-up order in respect of the Company and accordingly I propose to make orders as asked, in accordance with the originating process. The Commissioner has filed evidence indicating that Mr Steve Sherman of Ferrier Hodgson, an official liquidator, has consented to be appointed by the Court to act as the liquidator of the Company. It is appropriate, therefore, that Mr Sherman be appointed as liquidator. I certify that the preceding eight (8) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 21 June 2006 Counsel for the Plaintiff: Mr B. Skinner Solicitor for the Plaintiff: Church & Grace Solicitor for the Defendant: Foleys Date of Hearing: 30 March 2006 Date of Judgment: 30 March 2006