FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation, in the matter of DirectCorp Pty Ltd (in liq)v DirectCorp Pty Ltd, [2006] FCA 1020 IN THE MATTER OF DIRECTCORP PTY LTD (IN LIQ) DEPUTY COMMISSIONER OF TAXATION v DIRECTCORP PTY LTD (ACN 090 070 956) NSD 352 OF 2006 LINDGREN J 31 JULY 2006 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 352 OF 2006 in the matter of DIRECTCORP PTY LTD (in liquidation) BETWEEN: DEPUTY COMMISSIONER OF TAXATION PLAINTIFF AND: DIRECTCORP PTY LTD (ACN 090 070 956) DEFENDANT JUDGE: LINDGREN J DATE OF ORDER: 31 JULY 2006 WHERE MADE: SYDNEY THE COURT NOTES THE FOLLOWING UNDERTAKINGS GIVEN BY NABIL MOUSSA TO THE COURT: 1. That he will capitalise, that is, convert into share capital, the amounts of all loans he has made to the defendant, including any amounts paid or to be paid by him on its account in connection with his application for an order terminating the winding up of the defendant; 2. That he will pay all and any amounts owing by the defendant to creditors as at 31 July 2006 in the event that the defendant should not do so; 3. That he will cause to be paid from the funds of the defendant a sum of $38,750 to Alliance Motor Auctions in satisfaction of the debt owed by the defendant to it; 4. That he will cause the defendant to lodge with the plaintiff all outstanding business activity statements of the defendant. THE COURT ORDERS THAT: 5. Pursuant to subsection 482(1) of the Corporations Act 2001 (Cth)the winding up of the defendant be terminated on 31 July 2006. 6. Nabil Moussa pay the plaintiff's costs, if any, of the application for an order terminating the winding up of the defendant. the court DIRECTs THAT: 7. Bryan Patrick Collis, the liquidator of the defendant, pay to himself, from his trust account held in the name of the defendant, $19,210.04 in payment of his remuneration on the liquidation and $1980 for his legal costs of the liquidation. 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 352 OF 2006 in the matter of DIRECTCORP PTY Ltd (in liquidation) BETWEEN: DEPUTY COMMISSIONER OF TAXATION PLAINTIFF AND: DIRECTCORP PTY LTD (ACN 090 070 956) DEFENDANT JUDGE: LINDGREN J DATE: 31 JULY 2006 PLACE: SYDNEY REASONS FOR JUDGMENT 1 Nabil Moussa ("Mr Moussa"), a contributory of DirectCorp Pty Limited (in liquidation) ("the Company"), applies under s 482 of the Corporations Act 2001 (Cth) for an order terminating the winding up of the Company. 2 The winding up order was made on 7 July 2006 on the application of the Deputy Commissioner of Taxation ("the Commissioner") as plaintiff. Bryan Patrick Collis was appointed as liquidator. The originating process was based on the Company's failure to comply with a statutory demand in respect of a debt owed by the Company to the Commissioner. At the date of the statutory demand the amount of the debt was $88,052.12. 3 The general background facts are found in Mr Moussa's affidavit sworn 24 July 2006. Mr Moussa is a car salesman and is the sole director of the Company. There are 10 shares on issue in the Company, of which Mr Moussa holds five and Simon Boutros holds five. 4 Mr Boutros has stated in an affidavit sworn 30 July 2006 that he is making arrangements to have himself removed from the records of the Australian Securities and Investments Commission ("ASIC") as a shareholder. He states that he was unaware until recently that he remained a shareholder and that he does not wish to retain a shareholding or to have anything further to do with the Company. Whatever all this may mean, perhaps all that is significant at present is that in his affidavit Mr Boutros also states that he does not oppose Mr Moussa's application. 5 According to an ASIC extract relating to the Company, the Company's registered office is at BKM Accounting, Suite 6, 235 Pitt Street, Merrylands, NSW 2160. That is an office of an accountancy practice where Bernard Moussa, a partner in the firm and registered tax agent, practises. Bernard Moussa has made an affidavit which has been read in support of Mr Moussa's application. He gives evidence of arrangements that he attempted to make on behalf of the Company with the Australian Tax Office ("ATO") for payment of the Company's tax liability. I need not recount in detail the course of events. There was a proposal in late 2005 for payment by instalments. The Commissioner's statutory demand, dated 1 November 2005, was served on the Company at its registered office, that is, care of Bernard Moussa's office, and that development prompted further discussions between him and the ATO. 6 The originating process filed on 21 February 2006 was also served at the Company's registered office. Under instructions from Mr Moussa, Bernard Moussa then had further discussions with an officer of the ATO. He states that a stage was reached when it was agreed that the Company would have until 30 June 2006 to pay the debt. 7 There were two adjournments of the hearing of the winding up application, one on 31 March 2006 and the other on 9 June 2006. On neither occasion was the Company represented. 8 On the third occasion when the proceeding was before the Registrar, on 7 July 2006, the Company was represented, and applied for yet a further adjournment. The Registrar refused the adjournment. The hearing then proceeded and a winding up order was made. Mr Moussa states that the solicitor who represented the Company on that occasion did not know, and therefore could not inform the Court, of the reason why the Company had not appeared on the earlier two occasions. Apparently its non-appearance then was referred to by the Registrar when she refused the adjournment. I need not go into the question whether the Registrar might have been persuaded to allow a further adjournment if she had been told about circumstances of which she was not in fact informed. 9 In his own affidavit, Mr Moussa recounts his responses to the Commissioner's statutory demand and originating process. Although his explanation is not entirely satisfactory, I accept that he believed that Bernard Moussa had the problem in hand and had arranged for the adjournments of the hearing of the winding up application. He states: "On 9 June 2006 I did not arrange for an appearance for the defendant when the matter was back in Court as I was of the belief that the defendant had, per the agreement with the ATO, until the 30 June 2006 to make the requisite payments and did not realise the significance of failing to arrange for an appearance." 10 Mr Moussa states that the reason he sought a further adjournment on 7 July was that finances were still being arranged to pay out the Commissioner. He states that he did not acquaint his solicitor with the arrangement he had previously made with the Commissioner, because he did not think it was relevant to getting an adjournment. 11 It was only when he was contacted by a representative of the liquidator shortly after the making of the winding up order (apparently by letter dated 11 July 2006 from Mr Collis) that Mr Moussa realised how serious the situation had become. He then instructed the Company's present solicitors, Robert Wehbe & Partners, to take the necessary steps to apply for a termination of the winding up order. 12 The Company's failure to defend the application for the winding up order is explained. 13 The Company carries on the business of buying and selling used motor vehicles under the registered name "Westside Motors" at 200-206 Parramatta Road, Homebush. The Company holds a licence as a full dealer under the Motor Dealers Act 1974 (NSW). The business name "Westside Motors Homebush" is registered in respect of the Company's business of "Used Car Retailing". 14 Mr Moussa has been in the business of selling used motor vehicles for some nine years and has carried on that activity through the Company since 2001. The Company itself has been in business for only the last five or six years. Mr Moussa states that when its business began, the Company incurred operating losses due to start-up costs, and that these losses were carried forward for accounting and tax purposes for a number of years. This is significant because it is only as recently as the year ended 30 June 2006 that the last of the carry forward losses have been removed from the Company's balance sheet. The existence of those losses has been shown in the balance sheets from year to year to the Company's disadvantage in terms of a balance sheet solvency test. 15 The first step that Mr Moussa appears to have taken following the making of the winding up order was to advance two sums of $90,000 and $10,000 to be placed in the trust account of Robert Wehbe & Partners in order to discharge the debt to the Commissioner and to pay the liquidator's costs. In his affidavit, Mr Moussa states that if the liquidator's costs and remuneration should exceed $10,000, he (Mr Moussa) undertakes to the Court to pay the excess if the winding up is terminated. In fact a letter from the liquidator shows that his fees total $19,210.04 and his legal costs are $1980 - a total of $21,190.04. The sum of $100,000 plus any further amounts Mr Moussa may advance to discharge the Company's liabilities will increase his loan account, that is, the amount of the Company's indebtedness to him. 16 There are three major creditors of the Company: The Commissioner $90,703.72 Alliance Motor Auctions ("Alliance") $38,750.00 Mr Moussa $214,328 Plus at least $100,000 17 The Commissioner has now been paid out from the funds of $100,000 advanced by Mr Moussa but, for convenience, I will treat it as owing and the sum of $100,000 as still held in the solicitors' trust account. 18 Importantly, Mr Moussa has undertaken to capitalise, that is to say, to "convert" the Company's indebtedness to him into share capital. This will make a substantial difference to the Company's balance sheet. 19 Mr Moussa has undertaken to the Court to pay out the Company's debt owing to Alliance. He has also undertaken, in the event that the Company should fail to do so, to pay any amounts owing to the Company's creditors as at 31 July 2006. 20 There is some difference of opinion as to the appropriate figure to assign to the Company's stock on hand. According to the Company's balance sheet for the year ended 30 June 2006, that amount is $315,000. However, in his affidavit, Mr Collis states that he received a report from Grays Asset Services giving an estimated market value and auction value of the motor vehicles owned by the Company of $397,000 and $277,000 respectively. Whatever the correct figure may be, and even if it is $277,000, once Mr Moussa's loan account is capitalised, the Company will be "balance sheet solvent". 21 Since the making of the winding up order Mr Moussa has been continuing to operate the Company's business with the consent of the liquidator. Over the period from 7 July 2006 to 28 July 2006 the liquidator has received $48,305 from the business, out of which payments of $13,319.33 have been made, leaving the liquidator holding as cash at bank a sum of $34,985.67. In addition, the Company holds at its business premises cash representing the proceeds of the sale of two motor cars. 22 The current position in relation to the Company's creditors (treating the sum of $214,328 owed to Mr Moussa as having been capitalised) and the assets/funds readily available to pay them may be summarised as follows: LIABILITIES (1) The Commissioner $90,703.72 (2) Westpac $6,803.48 (3) Goods and services tax $2,562.00 (4) Alliance $38,750.00 (5) Liquidator's remuneration $19,210.04 (6) Liquidator's legal fees $1,980.00 (7) Winding up fees payable to the Commissioner $1,046.55 TOTAL $161,055.79 READILY AVAILABLE ASSETS/FUNDS: (1) Cash at bank (net proceeds of trading $34,985.67 from 7 July to 28 July) (2) Amount deposited to trust account of solicitors $100,000.00 (3) Cash proceeds of sale of car $10,999.00 (4) Cash proceeds of sale of car $16,000.00 TOTAL $161,984.67 Excess of assets/funds over creditors $928.88. 23 The above figures do not take into account, of course, the asset constituting the stock on hand of at least $277,000. I take into account a statement made in the affidavit of Bernard Moussa that: "If the Court terminated the winding up the defendant would be able to meet its debts as and when they fell due and would be solvent with a positive cash flow." The Company is solvent from a balance sheet and trading viewpoint. 24 Accordingly, I think that an order should be made under s 482, upon Mr Moussa's giving to the Court the undertakings to which I referred. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. Associate: Dated: 8 August 2006 Counsel for the Contributing Applicant, Nabil Moussa: Mrs J Baxter Solicitor for the Plaintiff: Ms M Chung Solicitor for Bryan Patrick Collis, the Liquidator of the defendant: Mr M Bacina Dates of Hearing: 28 July, 31 July 2006 Date of Judgment: 31 July 2006