FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v QBridge Pty Ltd ACN 010 542 793 (In Voluntary Administration) [2008] FCA 1300 INSOLVENCY – consideration of an application under s 440A(2) of the Corporations Act 2001 (Cth) to adjourn an application for a winding‑up order – consideration of whether the interests of creditors are properly served by adjourning the application for a limited time Creevy & Anor v Deputy Commissioner of Taxation (1996) 19 ACSR 456 - cited First Netcom Pty Ltd v Deputy Commissioner of Taxation (2000) 35 ACSR 615 - cited Lemery Holdings Pty Ltd v Reliance Financial Services BC200804142 - cited DEPUTY COMMISSIONER OF TAXATION v Q BRIDGE PTY LTD ACN 010 542 793 (IN VOLUNTARY ADMINISTRATION) QUD72 OF 2008 GREENWOOD J 14 AUGUST 2008 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD72 OF 2008 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: Q BRIDGE PTY LTD ACN 010 542 793 (IN VOLUNTARY ADMINISTRATION) Defendant JUDGE: GREENWOOD J DATE OF ORDER: 14 AUGUST 2008 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The application for an order that the defendant be wound up in insolvency is adjourned to Wednesday, 27 August 2008. 2. The administrators to file and serve an affidavit by 4.00pm on Tuesday, 26 August 2008, setting out the results of their investigation into the viability and desirability of a Deed of Company Arrangement and setting out the recommendation which they would propose to make to creditors if a meeting of creditors is to be convened for that purpose. 3. The plaintiff and WorkCover Queensland have liberty to re‑list the proceeding upon 24 hours notice to each other and to the voluntary administrators, Mr David Michael Stimpson and Mr Terence John Rose. 4. Costs are reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD72 OF 2008 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: Q BRIDGE PTY LTD ACN 010 542 793 (IN VOLUNTARY ADMINISTRATION) Defendant JUDGE: GREENWOOD J DATE: 14 AUGUST 2008 PLACE: BRISBANE EX TEMPORE REASONS FOR JUDGMENT 1 The court has before it this afternoon an application by the Deputy Commissioner of Taxation for the winding up of the defendant company, under section 459P of the Corporations Act 2001. The plaintiff relies upon a failure to comply with a statutory demand, for the purposes of section 459E, which was served upon the defendant on 24 January 2008. The amount of the statutory demand was $493,534.14. 2 The brief chronology is that the originating process and supporting documents were filed on 8 April 2008. The originating process and supporting documents were served on 10 April 2008. The first return date for the matter was 8 May 2008 and on that date the matter was adjourned by consent of the parties to 12 June 2008. Orders were made at that time which contemplated that by certain dates the defendant would lodge and pay income tax in respect of returns for the financial years ending 2006 and 2007. Other matters contemplated that the director of the defendant company would pay weekly instalments of $60,000 up to a total amount of $240,000 to the applicant plaintiff. 3 The matter came before the court again on 12 June 2008 and was adjourned until 24 July 2008. Again, at that time, consideration was given to the time needed for the plaintiff to consider the documents lodged by the defendant with the Commissioner and information was to be provided regarding the progress of an application for finance made by the defendant with the secured creditor, St George Bank. The arrangements contemplated that periodic payments would continue to be made as outlined in correspondence dated 7 May 2008. 4 The matter came before the court again on 24 July 2008 and arrangements and orders were then made for the filing of affidavits and affidavits in-reply on the question of solvency. The matter was listed for a return date on 14 August 2008. 5 On 13 August 2008, yesterday, voluntary administrators were appointed by the company. Accordingly, the preliminary application made today is for orders that the application for a winding-up order be adjourned. Apart from orders sought by the applicant for leave to file the application and dispense with service, orders are sought in these terms: Order 3 It be directed that the applicant/administrators serve an affidavit by 4pm, on 24 August 2008, setting out the results of their investigations into the viability and the desirability of a Deed of Company Arrangement and setting out the recommendation which they would propose to make to creditors if a meeting of creditors is to be convened. Order 4 The hearing of the application filed in the within proceedings for an order to wind up the defendant be adjourned until Monday, 1 September 2008, at 9.30am, before the Registrar. Order 5 The plaintiff and WorkCover Queensland have liberty to have the matter relisted upon the giving of 24 hours written notice to each other and to Mr David Michael Stimpson and Mr Terrance John Rose, the voluntary administrators. 6 Further orders sought include an order that the costs of the application be reserved. In support of these orders, an affidavit has been filed and served by Mr David Michael Stimpson who, together with Mr Terrance John Rose, was appointed voluntary administrator of the defendant on 13 August 2008. The most immediately apparent fact is that the voluntary administrators have been in office for something of, at the most, 24 hours. Mr Stimpson deposes to a range of matters which are said to inform the exercise of discretion for the purposes of s 440A(2) of the Corporations Act 2001 (Cth) and the exercise of discretion in what is said to be the inherent jurisdiction of the Federal Court of Australia. Section 440A(2) is well known and provides that: 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. 7 The focus of Mr Stimpson's affidavit is to set out facts and circumstances which are said to be persuasive of it being in the interests of creditors that the company continue in voluntary administration rather than being wound up now. It should also be borne in mind that the application is for an adjournment of the matter until 1 September 2008 at 9.30 am, rather than any general adjournment of the matter. An application for a general adjournment, of course, would be misconceived, but the point for the moment is that the adjournment period is sought till 1 September 2008. The defendant company says, through Mr Mills, that the period of adjournment is contained, proportional and reasonable, having regard to the facts and circumstances deposed to by Mr Stimpson. 8 As to those facts and circumstances, a number of matters are advanced which are said to be persuasive of the interests of creditors being served by the company continuing under administration. I do not propose to recite in these ex tempore reasons all of the facts and circumstances. However, a number should be noted. The first matter which is given the most emphasis is that the company continues to trade and continues to conduct itself as a going concern. That matter is deposed to in para 3.8 of Mr Stimpson's affidavit. That notion, of course, is odd in the sense that it must necessarily be common ground that the defendant company is insolvent. The defendant has not been able to, and does not seek to, rebut the presumption of insolvency and, of course, voluntary administrators have been appointed in any event. 9 The company therefore is not in a position to pay its debts as and when they fall due and the evidence demonstrates that there are at least two creditors, namely, the plaintiff and the supporting creditor, WorkCover Queensland, who press for payment of unpaid debts. Nevertheless, the short point seems to be that the company is functioning as a trading entity engaged in the conduct of its business which is the construction of civil works, including bridges and infrastructure. What flows from that observation is that the voluntary administrators consider that their ability to sell the business is enhanced, firstly, if the business is a going concern and, secondly, if they are in office and in a position to sell the business as a going concern. 10 The administrators contrast that position with that of the liquidator. A number of other matters which touch on that matter include the contention that under voluntary administration employees are said to be more likely to stay on during the period of voluntary administration rather than upon appointment of a liquidator. That may or may not be right as compared with liquidation, however, it seems to me that the question for consideration for the moment is whether it is likely that employees would continue to support the company during the period of voluntary administration (during the period of the proposed adjournment). Other matters go to questions of the recovery of payments which are due to the company. One payment in an amount of $100,000 is due for payment tomorrow by a company called Noble Mansions Proprietary Limited and a further amount of $100,000 is payable by a company called Glenhaven Developments Pty Ltd on 31 August 2008. 11 Mr Stimpson on behalf of the administrators says that the administrators are willing and anxious to proceed and Mr Stimpson says there is a reasonable prospect of a suitable Deed of Company Arrangement proposal emerging. That matter is dealt with further at para 4.3(c) of his affidavit. No particular detail is given of any proposed Deed of Company Arrangement although it is said that there are 'possible and varied Deeds of Company Arrangement' that might be proposed by either the directors or potential buyers or related parties. One of those potential buyers is said to be an entity described as 'Downer EDI'. In the affidavit material, unlike a number of the authorities to which I have been referred, there is no formulation of a Deed of Company Arrangement actually proposed which might inform whether an adjournment is in the interests of the creditors. There is no identification of an amount of money which might be set aside, either by reason of contributions by the directors or through financing arrangements and there is no comparison between the dividend which would be payable to creditors under a Deed of Company Arrangement and a dividend payable in a liquidation. It seems a little difficult, therefore, on the present material to necessarily conclude that there is persuasive evidence that the creditors would be better off and their interests properly served by the company remaining in voluntary administration rather than liquidation. However, the consideration which must be given some weight is that the voluntary administrators have been in office for a day. They have not had an opportunity to comprehensively or forensically examine the field of facts and circumstances which would inform whether the company can be sold as a going concern or whether a Deed of Company Arrangement might be proposed and put to the creditors. 12 That presents a little difficulty because the authorities demonstrate that one must be satisfied on persuasive evidence that the interests of the creditors will be served by enabling the defendant company to continue in voluntary administration and thus an adjournment might follow. Some additional matters ought to be mentioned and they include these. Historically, the matter has proceeded from January 2008 to today, 14 August 2008. By that, of course, I mean that those in charge of the company's affairs have had a very considerable period of time to confront the financial circumstances of the company and consider whether there might be mechanisms which might be invoked by which the interests of the creditors of the company might be served other than by means of a liquidation of the company. 13 In particular, of course, a proposal for a Deed of Company Arrangement might have been formulated. Mechanisms for compromising claims which might otherwise have been implemented through a voluntary administration earlier in time could have been considered including the possibility of convening of a meeting of creditors with a view to considering, and if thought be appropriate, passing a resolution to adopt a Deed of Company Arrangement. Notwithstanding that there has been considerable delay in confronting those matters by the directors of the company, it seems to me that the question for consideration by the court is not one of whether the directors ought to be penalised for failing to deal with those matters but whether, truly, the interests of the company's creditors are today served by adjourning this application for a period of time to enable relevant matters confronting the administrators to be investigated. 14 Mr Stimpson, in his affidavit, turns to those matters which are of particular consideration and importance in reaching a view about realisation of assets. At para 4.9 of his affidavit, Mr Stimpson says that the voluntary administrators wish to undertake a more detailed review of the business in the next seven days. He says that the administrators intend to immediately undertake discussions with St George, the secured creditor, in the next seven days to understand their attitude to the matter generally and the question of whether they might fund the discharge of creditors' claims. Further, the voluntary administrators wish to undertake discussions with Downer EDI in the next seven days in order to understand that company's intentions in relation to a potential acquisition of all or part of the defendant's business undertaking. 15 The voluntary administrators propose within seven days to then report to the parties by way of an affidavit as to the progress of those discussions. The parties might then be informed as to the position they may wish to take in relation to those matters. In relation to the sale of the business as a going concern, the affidavit evidence deposes to the possibility of a sale of the business either in part or in whole to Downer EDI. Those discussions are supported by a series of emails which are exhibited to Mr Stimpson's affidavit. It is fair to say that Downer EDI has responded to initiatives from Mr Armstrong (of the defendant) about the possibility of a sale and has expressed interest in investigating aspects of the scope of the business, the nature of the assets and other related matters. 16 In his affidavit, Mr Stimpson deposes to an amount of $2.1 million as the figure discussed for the sale of the business. That amount is not mentioned in the emails. However, it is said to be the amount which the vendor of the business would seek to obtain for a sale of the business undertaking as a result of conversations with Downer EDI. Like all things, the question of whether Downer EDI would ultimately reach an agreement to purchase is informed by this observation in the email from Mr Brian Ashworth of Downer EDI to Mr John Armstrong on Tuesday, 12 August 2008, at 1.02 pm when he said: Although we understand you wish to have certainty in this matter, the acquisition process does take time. This will involve an initial investigation concerning face to face meetings and possible site visits before requesting board permission to proceed. If board approval is gained, a due diligence process then occurs before a final decision can be made. 17 It seems to me that the emails quite properly reflect that orthodox commercial practice. It is equally true that the emails do show that Downer EDI has expressed interest in investigating at least the possibility of understanding the defendant's business and investigating whether it is in the interests of the proposed purchaser to acquire that business. The secured creditor is St George and Mr Stimpson, in his affidavit at para 4.7 says that he is informed by Mr Armstrong and verily believes that St George has not commenced any action or taken any steps to enforce the securities it holds against debtors of the defendant company or property of the company. Mr Stimpson observes that St George has security over the property of Mr Armstrong and other guarantors sufficient to satisfy the debt owed to it which is approximately $600,000. 18 The plaintiff has filed a further affidavit by leave in which the amount of the present debt is identified. The amount of the statutory demand, as I mentioned, was $493,534.14 and that amount has been reduced to $121,491.39. However, the defendant company has incurred further debt to the plaintiff since the issue of the statutory demand on 24 January 2008, and in the affidavit of Yvonne Marie Emerson, Ms Emerson says that the amount is $480,802.81. The deponent says that this amount comprises the unpaid amount of $377,721.93 in relation to the running balance account - known as the RBA - of the defendant, inclusive of the additional general interest charge – known as the GIC - on that component, and the unpaid amount of $103,080.88 in relation to the superannuation guarantee charge – known as the SGC. 19 Accordingly, at the date of swearing Ms Emerson's affidavit, the defendant company is indebted to the plaintiff in an amount of $602,294.20. There is a supporting creditor who has appeared in the matter today and that is WorkCover Queensland. The earlier orders of Deputy District Registrar Ramsey refer to a further creditor who has also sought to intervene. Mr Mills says, on behalf of the voluntary administrators, that if investigations are conducted which bear fruit and which result in a sale of the business as a going concern at an amount of $2.1 million, being the amount foreshadowed at least in discussions, the result would be that all creditors would be fully discharged 100 cents in the dollar. 20 A further matter which should be mentioned is that, as I have already indicated, there are debts of $100,000 due to the defendant pursuant to contractual payment obligations, the first of which is payable tomorrow in an amount of $100,000, and the second is payable on 31 August 2008. In the light of that payment, Mr Stimpson says that the voluntary administrators are willing to pay the wages due today of $15,000 and will, on that footing, undertake and accept appointment (and continue) as voluntary administrators. It may be as Mr Mills points out that that payment is not made or that the further payment fails to be made in which event the voluntary administrators may well wish to cease to act. 21 The plaintiff opposes the application for an adjournment and asks a series of questions which reflect the criteria to be addressed arising out of a number of the well known and well understood authorities. The first question is whether the company is continuing to trade or not. In this case the company is functioning as a construction company and continuing to presently operate. The second question is whether the company is insolvent. Plainly, it is. The third question is whether there are creditors who have taken positions which are contrary to an adjournment or whose interests might be otherwise affected or prejudiced. A further question involves whether there is conduct on the part of the defendant company or its officers which might reflect breaches of the Corporations Act and whether those rights and remedies might be addressed more appropriately by a liquidator rather than voluntary administrators. 22 In this particular case, there is no persuasive conduct on the part of the officers of the company which would suggest that there has been insolvent trading although, of course, there simply is no evidence of any of these conduct questions because the voluntary administrators have not had sufficient time to examine the various matters. Although the observations in the authorities to which I have been referred, including Creevy & Anor v Deputy Commissioner of Taxation (1996) 19 ACSR 456; First Netcom Pty Ltd v Deputy Commissioner of Taxation (2000) 35 ACSR 615; and Lemery Holdings Pty Ltd v Reliance Financial Services BC200804142, emphasise the importance of probative and persuasive evidence that the interests of creditors will be served by enabling the company to continue in voluntary administration, it seems to me that the circumstance that the voluntary administrators have been in office for merely a day (notwithstanding inferences which might arise from the appointment of administrators the day before the return date for the hearing) emphasises that the question to be addressed is whether, in the limited time available to the voluntary administrators to forensically examine the affairs of the company, the interests of the company's creditors are better served by enabling the company to continue in voluntary administration during the period of the adjournment, so that all relevant matters identified by the administrators might be examined. It seems to me that it is in the interests of creditors to enable some forensic assessment to be made by professional voluntary administrators, of facts and circumstances which might demonstrate that the entity can continue to trade as a going concern and is capable of being sold. 23 However, the question of the long delay between the identification of the plaintiff's claims by the defendant and the questions that directors would necessarily confront in dealing with the consequences for the company of that claim and the claims of other creditors, need to be considered in dealing with a reasonable adjournment period. I say reasonable because the question of whether the interests of the creditors are served is influenced, of course, by the period of the adjournment itself. In this case the voluntary administrators contend that they require seven days to conduct what I will call the threshold discussions with St George and Downer EDI. 24 Accordingly, what I propose to do this. I will grant the adjournment of the application for the winding up order for, in effect, a period of eight days by which time the voluntary administrators will have had an opportunity to determine whether the amount of $100,000 is paid tomorrow and, secondly, whether, based upon their expertise and experience generally, the responses that they obtain from St George and/or Downer EDI leads them to believe that there is any prospect of a Deed of Company Arrangement emerging which would result in a dividend to creditors greater than a dividend upon liquidation or whether there is a prospect of a sale of the business either at an amount which would discharge the creditors in total as is suggested or at some lesser amount which would result in a calculation of a dividend which might be favourably compared with that obtaining in a liquidation. 25 Having said that, what I propose to do is adjourn the plaintiff's application for winding up and thus the hearing of the application to until 27 August 2008. 26 I reserve the costs. 27 I further order that either the plaintiff or WorkCover Queensland have liberty to have the matter relisted upon 24 hours notice to each other and to the voluntary administrators, Mr David Michael Stimpson and Mr Terence John Rose. I certify that the preceding twenty‑seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate: Dated: 14 August 2008 Counsel for the Plaintiff: Plaintiff represented by Australian Taxation Office Solicitor for the Plaintiff: Mr S Jury, Solicitor, Australian Taxation Office Counsel for the Defendant: Defendant represented by Solicitors Solicitor for the Defendant: Mr P Mills, Mills Oakley Lawyers Solicitor for the Intervening Creditor, WorkCover Queensland: Ms E Anderson, Solicitor, Tucker & Cowen, Solicitors Date of Hearing: 14 August 2008 Date of Judgment: 14 August 2008