FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v Ansett Resources & Industries Pty Ltd [2010] FCA 833 Citation: Deputy Commissioner of Taxation v Ansett Resources & Industries Pty Ltd [2010] FCA 833 Parties: DEPUTY COMMISSIONER OF TAXATION v ANSETT RESOURCES & INDUSTRIES PTY LTD ACN 116 913 663 File number: QUD 243 of 2010 Judge: REEVES J Date of judgment: 6 August 2010 Legislation: Corporations Act 2001 (Cth) ss 109X(1), 286, 459C(2)(a), 459E, 467, 468, 471A, 482Taxation Administration Act 1953 (Cth) s 14ZZM Federal Court of Australia Act 1976 (Cth) s 23 Federal Court Rules Cases cited: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; [2008] HCA 41HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd (2002) 44 ACSR 169; [2002] FCA 1638 Kalifair Pty Ltd v Digi-Tech (Aust) Ltd (2002) 55 NSWLR 737; [2002] NSWCA 383 Masri Apartments Pty Ltd (in liq) v Perpetual Nominees Ltd (2004) 209 ALR 86; [2004] NSWCA 255 Powerflex Services Pty Ltd v Data Access Corporation (1996) 137 ALR 498 Ng v Van Der Veldt [2010] FCA 89 Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685 Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2008] FCA 1867 Adam P Brown Male Fashions Proprietary Limited v Philip Morris Incorporated (1981) 148 CLR 170 Contender 1 Ltd v LEP International Pty Ltd (1988) 82 ALR 394; [1988] HCA 60 House v The King (1936) 55 CLR 499 Commissioner of Taxation of the Commonwealth of Australia v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32 Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd 6 ATR 54 Gronow, McPherson's Law of Company Liquidation (Lawbook Co., subscription service) Dates of hearing: 23 and 30 July, 2 and 3 August 2010 Date of Order: 3 August 2010 Place: Brisbane Division: GENERAL DIVISION Category: No Catchwords Number of paragraphs: 25 Solicitor for the Plaintiff: Australian Taxation Office Counsel for the Defendant: Mr J Davies Solicitor for the Defendant: Rodgers Barnes & Green IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 243 of 2010 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ANSETT RESOURCES & INDUSTRIES PTY LTD ACN 116 913 663 Defendant JUDGE: REEVES J DATE OF ORDER: 3 AUGUST 2010 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The defendant's application for an extended stay of the winding-up order made on 30 July 2010 be dismissed. 2. The defendant pay the plaintiff's costs, to be taxed, to be reimbursed in accordance with s 466(2) of the Corporations Act 2001 (Cth). 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 Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 243 of 2010 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ANSETT RESOURCES & INDUSTRIES PTY LTD ACN 116 913 663 Defendant JUDGE: REEVES J DATE: 6 AUGUST 2010 PLACE: BRISBANE REASONS FOR JUDGMENT INTRODUCTION 1 On the afternoon of Friday, 30 July 2010 I made orders for the winding-up of Ansett Resources & Industries Pty Ltd and the appointment of a liquidator. On the application of Mr Davies, counsel for Ansett, I ordered an interim stay of those orders until the close of business on Monday, 2 August 2010. On 2 August 2010, I heard submissions directed to Mr Davies' application to have the stay order extended and I reserved my decision. At the same time, I extended the interim stay order to the close of business on 3 August 2010. On the afternoon of 3 August 2010, I dismissed Ansett's application for an extended stay order and indicated I would publish my reasons at a later time. These are my reasons for making that order. procedural history 2 The Deputy Commissioner of Taxation's application to wind up Ansett was based upon an unsatisfied statutory demand that was served under s 459E of the Corporations Act 2001 (Cth) ("the Act") on 16 March 2010. That statutory demand related to a total debt of approximately $9 million that was due and payable under various taxation assessments issued by the Deputy Commissioner. 3 When the application was first before me on 23 July 2010, Ansett initially opposed it on the ground that the Deputy Commissioner had failed to properly serve the statutory demand under s 109X(1) of the Act. In response to this challenge, the Deputy Commissioner eventually filed a further affidavit of service which addressed all of the deficiencies raised by Ansett. Following that, Mr Davies successfully applied to have the hearing of the application adjourned to 30 July 2010 to allow Ansett to attempt to prove it was solvent. 4 When the hearing resumed on 30 July 2010, Mr Davies sought a further adjournment of the application for two months to allow the company to obtain the evidence necessary to establish its solvency. In making that application, Mr Davies relied upon an affidavit of Mr Byrt, a director of Ansett, sworn 29 July 2010. After hearing submissions, I refused that adjournment application. 5 Ms Cameron, for the Deputy Commissioner, then sought to proceed with the winding-up application. In response, Mr Davies submitted that I should not make a winding-up order in the exercise of my discretion under s 467 of the Act on the grounds that: the company wished to object to the taxation assessments issued by the Deputy Commissioner; and the company was solvent. On the latter, Mr Davies relied, again, upon Mr Byrt's affidavit sworn on 29 July 2010. I rejected Mr Davies' submissions and proceeded to make the winding-up order. I then made the interim stay order mentioned above. contentions 6 As I have already mentioned above, when the hearing of this matter resumed on Monday, 2 August 2010, Mr Davies informed me that he had been instructed that the company wished to lodge an appeal against the winding-up order and, based on that, he sought to have the stay of the winding-up extended order until 1 December 2010. In making this application to extend the stay order, Mr Davies again relied upon Mr Byrt's affidavit sworn 29 July 2010. He also relied upon a draft notice of appeal, a set of draft orders and a set of signed undertakings that Mr Byrt provided to the Court. The grounds of appeal set out in the draft notice of appeal were: 1. That the Court erred in failing to exercise its discretion to grant an adjournment of the Application to wind up the Appellant ("Company") in circumstances where the Company had made arrangements to prepare a solvency report on this financial position; 2. That the Court erred in failing to exercise its discretion not to grant the winding up order in circumstances where: (a) The only current liability of the Company was the debt claimed by the Respondent; (b) The debt claimed by the Respondent was based on default assessments; (c) On the affidavit of the Company's director, it appeared that the correct liability of the Company for tax was substantially different to the Respondent's claim; (d) The Company's director had deposed to a clear intention and arrangements to object to the Respondent's assessment of the Company's tax liability. 3. That the Court erred in failing to grant a stay of the winding up order sufficient to permit the Company to pursue an objection to the Respondent's asserted claim for tax payable by the Company in circumstances where: (a) The only current liability of the Company was the debt claimed by the Respondent; (b) The debt claimed by the Respondent was based on default assessments; (c) On the affidavit of the Company's director, it appeared that the correct liability of the Company for tax was substantially different to the Respondent's claim; (d) The Company's director had deposed to a clear intention and arrangements to object to the Respondent's assessment of the Company's tax liability. 7 Mr Byrt's signed undertakings were: 1. To pursue as expeditiously as possible an appeal to the Full Court of the Federal Court of Australia in respect of the order to wind up the Defendant on 30 July 2010; 2. Within seven days, to provide security for the costs of the Plaintiff, Deputy Commissioner of Taxation, in the sum of $50,000.00; 3. Within seven days, to lodge in the trust account of his solicitors the sum of $50,000.00 to be applied solely in the pursuit of the said appeal; 4. To arrange for the completion of the financial statements and tax returns of the Defendant Company for the period up to 30 June 2010; 5. To lodge and pursue objections as expeditiously as possible, on the Company's behalf, to the tax assessments and amounts claimed by the Plaintiff, Deputy Commissioner of Taxation; 6. Not to dispose of any assets of the Defendant Company other than in the ordinary course of its business. 8 I should also record that one of the draft orders Mr Davies provided to me proposed that, under s 468 of the Act, the company should be allowed to apply the sum of $150,000 held in the trust account of its solicitors, to pay the company's accountants their fees for completing the financial statements of the company for the financial years up to 30 June 2010 and for lodging taxation returns for those periods. This was necessary, so Mr Davies informed me, because without these up-to-date financial statements, the company was unable to provide any reliable accounting information going to its solvency and it did not have the necessary information to lodge objections against the taxation assessments issued by the Deputy Commissioner. In essence, Mr Davies submitted that the company needed an extended stay of four months to allow it to obtain this up-to-date accounting information. 9 Ms Cameron made a number of submissions in opposition to the extension of the stay. First, she submitted that, however much the company might wish to object to the taxation assessments, because of s 14ZZM of the Taxation Administration Act 1953 (Cth) and the effect of the High Court's decision in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; [2008] HCA 41 ("Broadbeach Properties"), the taxation debt had to be treated as an undisputed debt. Secondly, and as a consequence of this, she submitted that there was no merit in any of the grounds in the company's draft notice of appeal, in particular grounds 2 and 3. As to ground 1, she submitted that Mr Byrt, as a director of the company, had an obligation to ensure that the company maintained proper and accurate financial records and, if he had complied with this obligation, there would be no need for any delay to allow the company's accountants to prepare such financial records, so the company could attempt to establish its solvency. Further, she pointed to the fact that, on Mr Byrt's own figures, the company had a net deficit of assets over liabilities (including contingent liabilities) of approximately $6 million. Thirdly, she submitted that I should take into account the following matters in assessing the balance of convenience: Mr Byrt's undertakings were too vague to offer any protection to either the Deputy Commissioner, or any other creditors of the company; it followed that there was a significant risk of the company's assets being dissipated during the period of the stay; it was not in the public interest, particularly the interests of existing and future creditors, that the company, which was presumed to be insolvent under s 459C(2)(a) of the Act, be able to trade and incur debts for a period of four months; and a stay of four months would create significant practical difficulties for the liquidator if the winding-up eventually proceeded because he would have to apply the relation back period from the original winding-up date of 30 July 2010. relevant principles 10 Two points should be made at the outset. First, because of the interim stay I ordered on 30 July 2010, s 471A of the Act did not prevent Mr Byrt, as a director of the company, giving instructions to the company's solicitors, on behalf of the company, to lodge an appeal against the winding-up order. Ms Cameron did not contend otherwise in her oral submissions. Secondly, Mr Davies said in his oral submissions that this application was not made under s 482 of the Act. 11 Notwithstanding this second matter, it is clear, in my view, that I have the power under s 23 of the Federal Court of Australia Act 1976 (Cth) to order a stay of the winding-up order pending an appeal to the Full Court. The grant of such a stay is a matter for the discretion of the Court in all the circumstances of the case: see HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd (2002) 44 ACSR 169; [2002] FCA 1638 ("HVAC") at [47] to [48] per French J. Furthermore, the principles applicable to this stay application are the same as those that apply under the Rules of Court to the stay of any order of the Court pending an appeal: see Kalifair Pty Ltd v Digi-Tech (Aust) Ltd (2002) 55 NSWLR 737; [2002] NSWCA 383 ("Kalifair") at [18]; Masri Apartments Pty Ltd (in liq) v Perpetual Nominees Ltd (2004) 209 ALR 86; [2004] NSWCA 255 ("Masri") at [17]; and Gronow, McPherson's Law of Company Liquidation (Lawbook Co., subscription service) at [16.190]. 12 Under the Federal Court Rules, the normal principles are these. First, it is not necessary to demonstrate some "special" or "exceptional" reason for the stay: see Powerflex Services Pty Ltd v Data Access Corporation (1996) 137 ALR 498 at 499 and HVAC at [48]. Secondly, there is an onus on the applicant to make out a reason or appropriate case for the discretion to be exercised in its favour: see HVAC at [48] and Ng v Van Der Veldt [2010] FCA 89 ("Ng") at [20] and [21]. Thirdly, the fact that an appeal will be rendered nugatory if a stay is not granted, is usually regarded as a substantial factor in favour of a stay. This, in turn, requires some assessment to be made to the prospects of success on the appeal: see, variously, Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685 at 695; Kalifair at [18]; Masri at [17]; HVAC at [49(b)]and Ng at [21]. That assessment has been described as: "a preliminary non-speculative assessment of whether the appellant by the grounds of appeal has raised an arguable case … [involving] … a low threshold of arguability": see Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2008] FCA 1867 at [40] per Greenwood J and Ng at [36]. Fourthly, if the grounds of appeal disclose an arguable case, it is necessary to consider where the balance of convenience lies. See Kalifair at [18] and Masri at [17]. In this respect, some of the factors that have been identified as being relevant to the stay of a winding-up application include: any detriment or risk to creditors or contributories flowing from the stay; the current trading position and solvency of the company; and the legislative policy expressed in the Act against delay in the liquidation process: see HVAC at [49] and, as to the latter, Broadbeach Properties at [15]. none of ansett's grounds of appeal has any merits 13 It is self-evident that Ansett's appeal against the winding-up order would be rendered nugatory if a stay of that order were not granted. I therefore need to assess, on a preliminary basis, whether the draft notice of appeal sets out grounds for the appeal that are at least arguable. 14 It will be immediately apparent that each of the grounds of appeal (see [6]) is directed to a discretionary decision. However, the first and third grounds are different from the second ground in a significant respect in that the first and third involve decisions about procedural rights, ie the refusal of an adjournment or a stay, whereas the second involves a decision about a substantive legal right, ie an order to wind up the company. In relation to the first and third, it is well established that an appeal court will approach any intervention with particular caution: see Adam P Brown Male Fashions Proprietary Limited v Philip Morris Incorporated (1981) 148 CLR 170 ("Adam P Brown") at 177 and Contender 1 Ltd v LEP International Pty Ltd (1988) 82 ALR 394; [1988] HCA 60 at 397. In relation to the second, an appeal court will generally not intervene unless the primary judge has acted upon some wrong principle or, if upon the facts, the decision is shown to be unreasonable or plainly unjust: see House v The King (1936) 55 CLR 499 at 505 and Adam P Brown at 176 to 177. 15 In his oral submissions, Mr Davies identified the error of principle involved as my failing to take into account a relevant consideration, specifically the fact the company disputed the taxation debt. He added that my failure to allow the company an adjournment or stay so that it could establish its solvency, caused a substantial injustice to it in the circumstances. 16 In my view, there is a number of fundamental problems with both of these submissions. First, despite the fact that the earliest notice of assessment (for $823,983.90) relates to the 2006/2007 financial year and was served on the company on 13 May 2008, the company has not yet lodged any notice of objection against any of the notices of assessment which go to make up the total taxation debt of approximately $9 million. Furthermore, the company frankly conceded that it will not be in a position to identify the precise nature of its objections until such time as its accountants have prepared its financial accounts up to the latest financial year, ie 30 June 2010. 17 Secondly, and perhaps more significantly, even if a proper objection raising a genuine case against all, or some, of the notices of assessment had been lodged, the relevant provisions of the applicable taxation legislation (summarised in Commissioner of Taxation of the Commonwealth of Australia v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32 at [16] to [22]), clearly provide that the amount in any notice of assessment becomes due and payable as a debt to the Commonwealth upon the assessment being served and that debt is liable to be paid notwithstanding any objection made to the assessment by the taxpayer. In other words, it must be treated as a debt that is "in effect undisputed": see Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd 6 ATR 54 at 57 per Bowen CJ in Eq, quoted with approval in Broadbeach Properties at [45] and, particularly, [48]. It follows that, whether or not the company disputes this taxation debt, it is a debt that is due and payable and which, for present purposes, I am bound to regard as undisputed. 18 As to the injustice said to be associated with failing to allow the company the opportunity to establish its solvency, a number of points can be made. First, because of the company's failure to comply with the statutory demand that was served upon it on 16 March 2010, it is presumed to be insolvent under s 459C(2)(a) of the Act. Secondly, despite the fact it was allowed an adjournment for a week, the only evidence it could produce to show it was solvent was Mr Byrt's affidavit sworn 29 July 2010 and even accepting Mr Byrt's figures about the value of the assets of the company in that affidavit, the company still has a deficit of assets over liabilities, including contingent liabilities, of approximately $6 million. While I am dealing with this aspect, I should also mention that, when the hearing resumed on 3 August 2010, I allowed Ansett to file a further affidavit by Mr Byrt which annexed a number of documents, including a valuation of the mining tenements owned by the company. That valuation put the estimated value of those tenements at $5.25 million. Even allowing for this increased value of the mining tenements, the company's net deficit of assets over liabilities would be in the vicinity of $800,000 or $4.6 million, depending on whether one takes into account the value of $3,864,424.40 Mr Byrt placed on these mining tenements in his affidavit of 29 July 2010. Moreover, none of the assets Mr Byrt described in either of these affidavits would appear to be easily liquidated such that the company could meet its current liabilities. They comprise: four fishing trawlers; a commercial building in Townsville; and a number of mining tenements. Finally, on this aspect, despite the one week adjournment I have mentioned above, I consider it is significant that the company was not able to produce any profit and loss statements, balance sheets, or other financial records disclosing the company's current financial position. This fact was frankly acknowledged by Mr Byrt in his affidavit of 29 July 2010. Without this information, it is axiomatic that it is impossible for Mr Byrt, or anyone else, including the company's accountants, to state what the company's current financial position is. Indeed, as mentioned above, the need to prepare the financial accounts for the company up to the last financial year is one of the reasons why the company sought this further stay of proceedings. 19 It follows that, even on a preliminary assessment and applying a "low threshold of arguability", I consider that none of the grounds stated in Ansett's draft notice of appeal has any merits. alternatively, the balance of convenience does not favour a stay 20 Even if I am incorrect in this conclusion, for the following reasons, I also do not consider the balance of convenience favoured extending the interim stay. First, as mentioned above, the company is presently presumed to be insolvent under s 459C(2)(a) of the Act and there is no evidence before me to displace this presumption. Furthermore, if anything, the evidence supports this presumption in that the company has a net deficit of assets over liabilities and those assets the company does own are not such that they are likely to be readily liquidated so as to meet the liabilities of the company. And, I consider this is partly supported by the fact that the company has not offered to secure any part of the debt of approximately $9 million due to Deputy Commissioner of Taxation. 21 Secondly, I am not satisfied that it is in the interests of the present and future creditors of the company that it be allowed to continue to trade. The major creditor of the company, viz the Deputy Commissioner of Taxation, accounts for more than one-half of the total actual and contingent liabilities of the company of approximately $17 million and that creditor opposes any stay of the winding-up order. I have not ignored the letter (annexed to Mr Byrt's affidavit of 3 August 2010) from McCullough Robertson, solicitors for Riel Finance Pty Ltd and UD Finance Pty Ltd, who are secured creditors of the company with a debt of approximately $1.4 million and who support the extension of the stay. The fact that their debt is secured and is a small fraction of that owed to the Deputy Commissioner of Taxation, strongly tells against my giving priority to their wishes ahead of those of the Deputy Commissioner. 22 Thirdly, I take into account the policy expressed in the Act against delay in liquidation proceedings such as this (see at [12] above). Fourthly, and related to this policy, I consider there is substance in Ms Cameron's submission about the practical difficulties that a stay of four months will cause for the liquidator in applying the relation back period (see [9] above). 23 Finally, I do not consider it is in the best interests of the creditors of the company, or in the public interest, that Mr Byrt be allowed to continue to remain in control of this company. My concern in this regard stems from two matters. The first is the appalling state of the financial accounts of the company demonstrated by Mr Byrt's frank concessions in his affidavit of 29 July 2010. The company does not appear to have prepared any proper accounting records for, at least, the past three to four financial years. In this regard, I do not accept Mr Byrt's explanation about difficulties and delays associated with the liquidation of related companies, Macair Airlines Pty Ltd and Byrt Holdings Pty Ltd. As a director of the company, Mr Byrt has a statutory obligation to ensure that the company's financial records were kept up-to-date: see, for example, s 286 of the Act. Secondly, in his affidavit of 3 August 2010, in an apparent attempt to bolster the assets of the company, Mr Byrt annexes an agreement which he says: "was done last August in relation to various tenements which I and others hold for the company". The fact that these assets were not disclosed as assets of the company in Mr Byrt's affidavit of 29 July 2010 raises serious concerns, in my mind, about this earlier affidavit and, in particular, his statement in it that he has set out the details of the company's assets, liabilities and business – the clear inference being that those details were full and complete. 24 So, even if I am wrong in concluding that the company's draft notice of appeal has no merits, I consider that the balance of convenience does not favour any further stay of the winding-up order I made on 30 July 2010. 25 For these reasons, I dismissed Ansett's application for an extended stay of the winding-up order I made on 30 July 2010. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves. Associate: Dated: 6 August 2010