Deputy Commissioner of Taxation v Vensys Australia Pty Limited (Administrators Appointed) (No 5) [2008] FCA 1795

FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Vensys Australia Pty Limited (Administrators Appointed) (No 5) [2008] FCA 1795

DEPUTY COMMISSIONER OF TAXATION v VENSYS AUSTRALIA PTY LTD (ADMINISTRATORS APPOINTED)

NSD 581 of 2008

EMMETT J

19 NOVEMBER 2008

SYDNEY IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 581 of 2008

BETWEEN: VENSYS AUSTRALIA PTY LTD (ADMINISTRATORS APPOINTED)

ACN 098 228 847

Applicant

AND DEPUTY COMMISSIONER OF TAXATION

Respondent

IN: DEPUTY COMMISSIONER OF TAXATION

Plaintiff

AND: VENSYS AUSTRALIA PTY LTD (ADMINISTRATORS APPOINTED)

ACN 098 228 847

Defendant

JUDGE: EMMETT J

DATE OF ORDER: 19 NOVEMBER 2008

WHERE MADE: SYDNEY

THE COURT:

1. Orders that the hearing of the Interlocutory Process filed on 7 November 2008 be adjourned to 28 November 2008 for directions. 2. Notes the agreement of the parties that each party bear its own costs of today. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 581 of 2008

BETWEEN: VENSYS AUSTRALIA PTY LTD (ADMINISTRATORS APPOINTED)

ACN 098 228 847

Applicant

AND DEPUTY COMMISSIONER OF TAXATION

Respondent

IN: DEPUTY COMMISSIONER OF TAXATION

Plaintiff

AND: VENSYS AUSTRALIA PTY LTD (ADMINISTRATORS APPOINTED)

ACN 098 228 847

Defendant

JUDGE: EMMETT J

DATE: 19 NOVEMBER 2008

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The plaintiff, the Deputy President of Taxation (the Commissioner), seeks an order that the defendant, Vensys Australia Proprietary Limited (the Company), be wound up in insolvency. The winding up application first came before me on 20 June 2008. Since then the proceeding has been before me on a number of occasions, on each of which I adjourned the hearing of the winding up application, in some cases without objection from the Commissioner, in other cases over the objection of the Commissioner. 2 Most of the adjournments were given in circumstances where undertakings were proffered to the Court by Mr Venkatesh Paditham, the director of the Company. Pursuant to those undertakings, various sums of money have been paid into the trust account of Cutler Hughes & Harris, solicitors (the Trust Account). The moneys so paid presently amount to the sum of $177,846. It is common ground that the payments of money into the Trust Account were made on conditions. However, there is now a dispute as to the precise conditions upon which the payments were made. 3 On 23 October 2008, the Company was placed in administration. The administrator, Mr William Hamilton (the Administrator), has moved the Court for an order that the moneys held in the Trust Account be paid to him as administrator, on the basis that he has a proper entitlement to them, since he is control of the Company as administrator. The Commissioner, on the other hand, opposes the direction sought by the Administrator, and says that the money should be retained in the Trust Account, pending resolution of the winding up application. 4 In an affidavit of 19 June 2008, Mr Paditham described a proposal for the purchase of the business of the Company by HTC Global Services Proprietary Limited (HTC). Mr Paditham indicated that an initial payment from HTC in respect of the proposed purchase would be applied to satisfy the debts owed by the Company to the Commissioner and other unsecured creditors. Mr Paditham undertook that any funds received by the Company from HTC in relation to any sale would be paid into the Trust Account, and not dispersed before 27 June 2008. Mr Paditham also undertook to cause the Company to make payments to cover liabilities to the Commissioner, as follows: $25,000 on 25 June 2008; $25,000 on 2 July 2008; $25,000 on 7 July 2008; and $25,000 on 26 July 2008. On 20 June 2008, I noted Mr Paditham's undertakings and adjourned the proceeding to 27 June 2008. 5 In a further affidavit of 27 June 2008, Mr Paditham gave an undertaking that an amount of $600,000, expected to be received as an initial payment from HTC for the purchase of the Company's business, would be used to pay the debts owed to the Commissioner and other unsecured creditors. At that stage, the first payment of $25,000 referred to in the affidavit of 19 June 2008 had been made. The amount was paid directly to the Commissioner and is not subject to the present dispute. 6 In a second affidavit of 27 June 2008, Mr Paditham gave further undertakings that, if the Company sells or otherwise disposes of any assets, the net proceeds would be paid into the Trust Account, that the Company would lodge its Business Activity Statement (BAS) for the June quarter by 28 July 2008 and that the Company would pay its liability under that BAS into the Trust Account at that time. Mr Paditham then referred to the undertaking, which he had given on 27 June 2008, that the amount of $600,000, expected to be received from HTC, would be paid into the Trust Account and asserted that an amount of $850,000, rather than $600,000, would be the amount received from HTC. 7 The three sums of $25,000 each were paid into the Trust Account as the second, third and fourth payments referred to in the undertaking given on 19 July 2008. In addition, a further sum of $54,846 was paid into the Trust Account in respect of the June quarter BAS. 8 In a further affidavit of 1 August 2008, Mr Paditham asserted that weekly cash flow of the Company had remained positive, even with the three payments of $25,000 and the payment of $54,846. In that affidavit, Mr Paditham asserted that the Company still had cash at bank and had not had to draw on its overdraft. Mr Paditham also gave an undertaking to make two payments of $24,000 each into the Trust Account by way of reduction of the debt owing to the Commissioner. On 15 August 2008, the first sum of $24,000 was paid into the Trust Account. The second sum of $24,000 was paid into the Trust Account on 22 August 2008. 9 In a further affidavit of 18 August 2008, Mr Paditham undertook to make a further payment of $16,000 into the Trust Account on 29 August 2008 to reduce the amount owing to the Commissioner. While a cheque for that sum payable to the Trust Account was tendered but dishonoured, the Company subsequently paid the sum of $16,000, on 15 October 2008, directly to the Commissioner in reduction of the Company's indebtedness to the Commissioner. 10 After considerable negotiation, an agreement was in fact entered into between HTC and the Company pursuant to which monies were paid by HTC into its solicitor's trust account. The agreement was conditional upon various matters. In the events that occurred, the agreement was subsequently rescinded, and it is clear that there will be no sale of the Company's business to HTC. 11 The Administrator contends that the money in the Trust Account is held on trust for the Company beneficially, subject to the Company's beneficial interest being defeasible in favour of the Commissioner upon the Company's being restored to solvency by a sale of its assets and undertaking to HTC in an amount sufficient to meet all liabilities of the Company, other than the current liabilities that were being met out of trading cash flow and the current liabilities of the Company to the Commissioner being paid out of the monies held in trust. The Administrator says that, since the proposed sale to HTC did not eventuate, the condition of defeasance did not occur and, accordingly, the money in the Trust Account belongs to the Company beneficially and should be paid to him as administrator. 12 He says that, since the various sums were paid into the Trust Account to be held for the special purpose of being paid to the Commissioner if, but only if, the Company was restored to solvency upon successful sale of the business to HTC and since that condition has failed, the money should now be paid to him. That is to say the condition, upon which the defeasance in favour of the Commissioner was to occur, has failed. 13 Clearly enough, a distinction can be drawn between the debt due to the Commissioner that was the subject of the statutory demand upon which the winding up application is based, on the one hand, and the accruing liability of the Company to the Commissioner from the continued trading of the Company, on the other hand. That distinction may have some significance in relation to the undertakings that were given by Mr Paditham, as a condition of the successive grants of indulgence to the Company by way of adjournment of the hearing of the winding up application. 14 The undertaking to pay into the Trust Account any sum received from HTC, by way of down payment pursuant to any contract for the sale of the Company's business, was obviously dependent upon the receipt of such a sum by the Company. The undertakings to make the successive payments that were, in fact, made, however, were given as an indication of good faith concerning the capacity of the Company to continue to carry on business with a positive cash flow so as to meet, from that positive cash flow, obligations that accrued from time to time thereafter, following each adjournment. 15 The payments made into the Trust Account were unquestionably intended for the Commissioner in some circumstances. As I have said, the dispute concerns what those circumstances were. But for the reluctance of the Commissioner to receive payments where she may be required to disgorge the payments as preferences upon the Company's going into liquidation, the payments would have been made directly to the Commissioner, as happened with the first payment of $25,000 and with the payment of $16,000 to which I have referred. 16 The payments into the Trust Account were made on the basis that, if the winding up application was dismissed, because the Company was solvent and was able to discharge its existing liabilities, the funds would be earmarked for the Commissioner. 17 While it was certainly in contemplation that the sale of the Company's business to HTC might result in the realisation of funds sufficient to discharge the existing liability to the Commissioner, which was the subject of the statutory demand, the payments into the Trust Account were not subject to a condition that the debt to the Commissioner be discharged solely from the proceeds of a sale to HTC. While the proposed sale to HTC was expected to be the source of proceeds sufficient to satisfy the debt owing to the Commissioner, such that the winding up application would be dismissed, it was not the successful sale only to HTC, but the dismissal of the winding up application on solvency of the Company, that was the relevant condition. 18 I consider that the sums were paid into the Trust Account on the basis that they would be held beneficially for the Commissioner upon the winding up application's being dismissed on the ground that the Company was solvent, whether or not that resulted from the sale of the Company's business to HTC. If, however, the application is not dismissed, and a winding up order is made, the Commissioner's interest will fail, since the money belongs to the Company. In those circumstances, the money will be available in the winding up of the Company. At present, the winding up application is still on foot. It now appears to be unlikely that there will be a dismissal of the winding up application, by reason of the Company's solvency. However, until that question can be finally determined with certainty, the money must remain in the Trust Account. The money in the Trust Account is, therefore, not presently available for the Administrator. The money may not be repaid to the Company unless it is finally established that the winding up application cannot be dismissed on the basis that the Company is solvent. 19 The winding up application is fixed for hearing on 28 November 2008. In the meantime, the second meeting of creditors has been convened by the Administrator for 27 November 2008, for the purpose of considering a proposal by Mr Paditham that the Company enter into a deed of company arrangement. If such a deed of company arrangement is entered into and the winding up application is dismissed as a consequence, it would follow that the money in the Trust Account would belong to the Company and would be available to the Administrator. That is to say, the winding up application would not have been dismissed by reason of the Company's solvency. 20 In the meantime, however, as I have said, the money must remain in the Trust Account unless it can be established beyond question that it is no longer possible for the winding up application to be dismissed on the basis of the Company's solvency. The Administrator's application for a direction that the money in the Trust Account be paid to him should not be granted at this stage. I shall deal with the winding up application on 28 November 2008. By that stage, there may well be an indication that a deed of company arrangement has been approved by the creditors. If, of course, the creditors reject any such proposal for a deed of company arrangement, then it would follow almost inevitably that a winding up application would be made on 28 November 2008. I will stand over the Administrator's interlocutory process for directions on 28 November 2008. At the agreement of the parties, there will be no order as to the costs of today. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.