FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation, in the matter of Rural & General Insurance Broking Pty Limited v Rural & General Insurance Broking Pty Limited [2011] FCA 683 Citation: Deputy Commissioner of Taxation, in the matter of Rural & General Insurance Broking Pty Limited v Rural & General Insurance Broking Pty Limited [2011] FCA 683 Parties: DEPUTY COMMISSIONER OF TAXATION v RURAL & GENERAL INSURANCE BROKING PTY LIMITED ACN 093 483 928 File number(s): NSD 1103 of 2010 Judge: JAGOT J Date of judgment: 10 June 2011 Catchwords: CORPORATIONS – application for substitution of plaintiff pursuant to s 465B of the Corporations Act – whether applicant was a person who might otherwise have applied for defendant company to be wound up – whether discretionary considerations favoured making of order for substitution Legislation: Corporations Act 2001 (Cth) ss 459P, 459R, 465B, 469C Federal Court (Corporations) Rules 2000 r 16.1 Cases cited: Masri Apartments Pty Ltd (in liq) v Perpetual Nominees Ltd (2004) 214 ALR 338; [2004] NSWCA 471 South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465 Date of hearing: 10 June 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 34 Counsel for the Plaintiff: The plaintiff did not appear Solicitor for the Defendant: Mr J Foley of Rockliffs Solicitors & IP Lawyers Counsel for the Applicant: Mr J T Johnson Solicitor for the Applicant: Australian Government Solicitor IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1103 of 2010 IN THE MATTER OF RURAL & GENERAL INSURANCE BROKING PTY LIMITED BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: RURAL & GENERAL INSURANCE BROKING PTY LIMITED ACN 093 483 928 Defendant JUDGE: JAGOT J DATE OF ORDER: 10 JUNE 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The interlocutory process filed 9 June 2011 be dismissed. 2. The Australian Prudential Regulation Authority pay the defendant's costs of the interlocutory process as agreed or taxed. 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 NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1103 of 2010 IN THE MATTER OF RURAL & GENERAL INSURANCE BROKING PTY LIMITED BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: RURAL & GENERAL INSURANCE BROKING PTY LIMITED ACN 093 483 928 Defendant JUDGE: JAGOT J DATE: 10 JUNE 2011 PLACE: SYDNEY REASONS FOR JUDGMENT background 1 This is an application under r 16.1(2) of the Federal Court (Corporations) Rules 2000 in which the applicant, the Australian Prudential Regulation Authority (APRA), seeks to have the orders of a Registrar in respect of an interlocutory application set aside. 2 There is no dispute before me that the review of a Registrar's decision is a hearing de novo. Rule 16.1(2) of the Federal Court (Corporations) Rules provides that: A decision, direction or act of a Registrar made, given or done under these Rules, may be reviewed by the Court or a Judge. 3 The application before the Registrar was an interlocutory process filed on 30 March 2011 in which APRA, pursuant to ss 465B, 459R and 459P of the Corporations Act 2001 (Cth) (the Corporations Act), sought an order that APRA be substituted for the Deputy Commissioner of Taxation (the Commissioner) as plaintiff in the originating process filed on 26 August 2010. By the originating process, the Commissioner sought an order for the winding-up of the defendant company, Rural & General Insurance Broking Pty Limited, in insolvency and for the appointment of a liquidator, as well as consequential orders. The Registrar declined to make an order for substitution as sought by APRA. 4 The application before me today was supported by an affidavit of Michelle Marie Thomas, sworn 28 July 2010. The affidavit deposes to the fact that Ms Thomas served a creditor's statutory demand for payment of debt, signed by the Commissioner, on the defendant company on 12 May 2010. The statutory demand was for a debt in the sum of approximately $149,200. Subsequent to the commencement of the present proceeding, the Commissioner and the defendant company reached an arrangement with respect to the payment of the debt owing, resulting in the withdrawal of the Commissioner by consent on 18 March 2011. However, APRA now seeks to be substituted for the Commissioner as plaintiff so that the winding-up application may proceed. 5 APRA's application is made pursuant to s 465B of the Corporations Act, which provides that: (1) The Court may by order substitute, as applicant or applicants in an application under section 459P… for a company to be wound up, a person or persons who might otherwise have so applied for the company to be wound up. 6 Under s 465B(2), the Court: …may only make an order if the Court thinks it appropriate to do so: (a) because the application is not being proceeded with diligently enough; or (b) for some other reason. 7 If such an order is made, the substituted applicant may under s 465B(4) proceed with the application instead of the original applicant. 8 APRA's evidence establishes that APRA and the defendant company were involved in proceedings in the ACT Supreme Court, being ACT Supreme Court proceedings 391 of 2003 (the ACT proceedings). On 18 June 2009, orders were made in the ACT proceedings that the defendant company pay a portion of APRA's costs of the proceedings. On 9 March 2011, a certificate of costs assessment was issued by which the ACT Supreme Court allowed costs in the amount of some $459,000. However, an objection to the costs assessment was made by an application filed on 7 April 2011 in which the defendant company sought orders that, amongst other things, the certificate of costs assessment be set aside. 9 On 6 June 2011, the ACT Supreme Court made orders setting aside the certificate of costs assessment of 9 March 2011 and instead issuing an interim certificate of costs in the amount of some $27,000. This amount represented the costs not in dispute contained in the bill of costs which led to the certificate of costs assessment of 9 March 2011. submissions APRA's submissions 10 APRA submitted that there are two bases on which it is a "person… who might otherwise… have applied for the [defendant] company to be wound up", as required by s 465B(1) of the Corporations Act. 11 First, there is no question that APRA is an actual creditor of the defendant company, at least for the amount of the $27,000 which is the subject of the interim costs certificate (the actual debt). As a creditor, APRA would be entitled under s 459P(1)(b) of the Corporations Act to apply for the defendant company to be wound up in insolvency. 12 Secondly, insofar as APRA may be a contingent creditor having regard to its overall claim for costs in the ACT proceedings – the general quantum of which is disclosed by the certificate of costs assessment of 9 March 2011, which was in the sum of some $459,000 – there is also no doubt that the Court would have power to grant leave under s 459P(2) for it to apply for the defendant company to be wound up in insolvency. Such leave would be granted only if the Court were satisfied, in accordance with s 459P(3), that there was a prima facie case that the defendant company was insolvent. Moreover, leave could be granted nunc pro tunc. In Masri Apartments Pty Ltd (in liq) v Perpetual Nominees Ltd (2004) 214 ALR 338; [2004] NSWCA 471 at [52], Beazley J said: In my opinion, there is no doubt as to the power of the court to grant leave at this point. In Emanuele v Australian Securities Commissions (1997) 188 CLR 114, the court held that a failure to obtain the leave of the court before proceeding to apply for the making of a winding-up order was a defect or irregularity which may be cured by granting leave nunc pro tunc: see also Re Testro Brothers Consolidated Ltd [1965] VR 18 at 33-5. 13 In this case, the defendant company's failure to comply with the Commissioner's statutory demand gives rise, under s 469C(2) of the Corporations Act, to a presumption of insolvency. As such, APRA submitted that there is a prima facie case that the company is insolvent. In addition, APRA pointed to the following matters which it said should be taken into account. First, the bill of costs relating to the ACT proceedings contained some 3,445 items. Of those, 2,601 are said by the defendant company to be disputed in their entirety. However, third-party expenses, including for example barristers' fees, account for some $177,000 of the disputed claim for costs (which is in the amount of some $432,000 (the contingent debt)). According to the objection filed by the defendant company on 7 April 2011, objection is taken to the third-party expenses solely on the basis that GST has been included. The exclusion of GST would lead to a reduction of the third-party expenses by only one-eleventh. Further, a draft balance sheet annexed to the affidavit of Timothy Charles Pratten sworn 8 June 2011 – Mr Pratten being a former director and current employee of the defendant company who has knowledge of its books and records as well as its operations – includes as at April 2011 an item entitled "Contingent Liability Legal" in the sum of $250,000, which can only constitute an allowance for APRA's costs of the litigation. 14 According to APRA, the decisions on which the defendant company relies to support its position that there should be no order for substitution all turned upon the existence of a genuine dispute about the quantum of the debt involved. However, APRA submitted that a mere assertion that a genuine dispute exists is insufficient. APRA described the objection taken by the defendant company to the certificate of costs assessment of 9 March 2011 as being no more than a general objection, in circumstances where the defendant company's own internal records recognise a $250,000 debt to APRA. APRA also noted that, despite Mr Pratten's evidence regarding the defendant company's financial circumstances, no evidence has been provided as to the identity of the company's creditors. As such, APRA suggested that there was insufficient evidence to displace the presumption of insolvency to which the defendant company's failure to comply with the Commissioner's statutory demand gives rise. 15 APRA also relied on other indications in the financial information provided by Mr Pratten to support its case as to the defendant company's insolvency. For example, APRA pointed to the fact that the audited accounts of the defendant company for the financial year ended 30 June 2010 contain a statement by the directors to the following effect: In the directors' opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable provided shareholders continue their financial support. 16 According to APRA, it is clear from this statement that if shareholders did not continue their financial support, the company would not be able to pay its debts as and when they became due and payable. 17 The audited financial accounts also disclose operating results of a loss of some $115,000 for 2010, over and above the losses of some $3,649 for 2009. 18 Despite this, APRA also emphasised that at this stage the only question with which I need be concerned is whether there is a prima facie case of insolvency under s 459P(3) of the Corporations Act. APRA submitted that, on the evidence available, there could be no doubt that this requirement is satisfied. As such, APRA said that since the Court would have power to grant it leave to apply for the defendant company to be wound up in insolvency pursuant to s 459P(1)(b) and (2) of the Corporations Act, it is a "person… who might otherwise have… applied for the company to be wound up" as required by s 465B and may therefore be substituted as the plaintiff in this proceeding. 19 In light of its standing under s 465B(1) and the above indications as to the defendant company's insolvency, APRA submitted that public policy considerations – specifically, the desirability of insolvent companies not being permitted to trade and being wound up as soon as possible – outweigh the considerations on which the defendant company relied, and that consequently an order for substitution should be made. Rural & General Insurance Broking's submissions 20 The defendant company noted that the only debt due to APRA at present was the actual debt owing pursuant to the interim costs certificate, which, as noted above, is in the amount of approximately $27,000. According to the defendant company, it has offered to pay the actual debt to APRA; an offer APRA refused to accept. The defendant company submitted that this might mean APRA is not an actual creditor of the company as at today's date; however, the focus of the defendant company's submissions was on the discretionary considerations relevant to the question whether an order for substitution should be made, rather than the standing of APRA under s 465B(1). 21 According to the defendant company, APRA's refusal to accept its offer to pay the actual debt would be a relevant discretionary consideration in any hearing of the winding-up application, and so is also relevant to the question whether APRA should be substituted as plaintiff for the Commissioner. 22 As to the issue of APRA's status as a contingent creditor, the defendant company emphasised that the only part of the bill of costs which is not subject to dispute is that part represented by the interim certificate of costs. Thus, APRA is an actual creditor only to the extent of the actual debt of some $27,000. Insofar as the contingent debt is concerned, the defendant company stressed that its objections included a general objection that the costs claimed by APRA were excessive. The defendant company said that this objection was evidence of the existence of a genuine dispute as to the quantum of the contingent debt to APRA. 23 Further, the defendant company noted that there is a convenient mechanism for resolution of the issues surrounding the contingent debt: namely, the ordinary processes in the ACT Supreme Court for finally determining the costs payable to APRA by the defendant company. As such, in circumstances where APRA has other remedies available to it, the defendant company said that the winding-up – which has now been on foot for some nine months – should not continue to hang over its head. 24 The defendant company also noted that the prima facie case of insolvency relied upon by APRA is based solely on the company's failure to comply with the Commissioner's statutory demand, in circumstances where the evidence is that an arrangement has been reached with the Commissioner leading to the latter's withdrawal from the winding-up application. 25 The defendant company also pointed to the evidence it has provided in relation to its financial position. While it accepted in its submissions that this evidence could not be described as "watertight" in respect of its continuing solvency, it submitted that the evidence nevertheless establishes that it is continuing to trade, has managed to trade its way out of difficulties, and is keeping proper records and accounts. This led the defendant company to submit that I should have a relatively low level of doubt as to its continued solvency. 26 Finally, the defendant company pointed to the evidence of Mr Pratten regarding the prejudice it would sustain if the winding-up application remained on foot. This was said to include difficulties in retaining staff, and difficulties relating to financing creditors and clients. 27 In light of all these factors, the defendant company submitted that the public policy interest in ensuring that insolvent companies do not continue trading – given the evidence available as to the company's financial position, the nature of the contingent debt, the genuineness of the dispute as to its quantum, and the defendant company's offer to pay the actual debt of $27,000 – does not favour not the making of an order for substitution of APRA as the plaintiff in this proceeding. discussion 28 I have been considerably assisted by the submissions of the parties, who have drawn my attention to a number of decisions of relevance to the present dispute. It is not necessary to refer to all the authorities to which I have been taken. For present purposes, it is sufficient to record the observations of Ryan J in South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465 (South East Water), in which his Honour said (at 472): In my view, the proper exercise of the discretion conferred by s 465B of the [Corporations Act] requires the court to weigh in the balance two competing policies. The first is that an insolvent company should not be permitted to continue to trade to the detriment of its existing and future creditors but should be wound up as expeditiously as possible. If the achievement of that objective is jeopardised by the inaction or lack of diligence of the petitioning creditor, another creditor should be substituted as contemplated by s 465B(1)(a) to allow the winding up proceeding to continue in the interests of the generality of creditors, some of whom may have refrained from initiating their own proceedings in the knowledge that the initial petition had been instituted. On the other hand, the court should not allow winding up proceedings to be used as a debt-collecting mechanism or an instrument of oppression to be held over the head of a company otherwise trading satisfactorily by a creditor whose debt is the subject of a genuine dispute. 29 In South East Water, Ryan J concluded that the applicant should not be substituted as a petitioning creditor in circumstances where the existence of the debt said to be due and owing under a solicitor's bill of costs had not yet been determined in a court of competent jurisdiction. For those reasons, although Ryan J was satisfied that the application for winding-up was not being proceeded with diligently or at all, his Honour decided that it would not be a proper exercise of discretion to allow the trustee of the relevant applicant to be substituted as a petitioning creditor. 30 In this case, I accept APRA's submission that I have the power to substitute APRA as the petitioning creditor pursuant to s 465B on either of the two bases it identified. As such, the real issue is the proper exercise of the discretion, having regard to all the relevant circumstances and in light of the two competing policies identified by Ryan J in South East Water. 31 I consider that, in this case, the competing discretionary considerations are relatively finely balanced. On the one hand, there is some question about the solvency of the defendant company in that the evidence as to its solvency is not entirely satisfactory. On the other, it cannot be said that there is not a genuine dispute about the quantum of the contingent debt owed to APRA in respect of the disputed elements of the bill of costs. Furthermore, the winding-up application has been on foot for some nine months, throughout which the defendant company has continued to trade: there is evidence that the company is maintaining proper financial records, has offered to pay APRA the actual debt of some $27,000, and has disputed the quantum of the contingent debt in accordance with the rules and procedures of the ACT Supreme Court. 32 Weighing up all the discretionary considerations in the light of the competing policies identified by Ryan J, I am not persuaded that an order for substitution should be made. 33 In reaching this conclusion, I place particular weight on the fact that the presumption of insolvency which arises in this case is based solely on the defendant company's failure to comply with the Commissioner's statutory demand, and the evidence is that a satisfactory arrangement has been reached between the Commissioner and the defendant company for payment of the debt. In addition, as noted above, there is evidence of a genuine dispute as to the extent of the contingent debt to APRA, and the defendant company has offered to pay the actual debt. Finally, the defendant company is maintaining proper books and records – at least according to the evidence available to me – and is continuing to trade under the difficult circumstances created by the delay in the resolution of the winding-up proceeding which was commenced by the Commissioner but has not been prosecuted diligently or, indeed, at all. 34 When I consider these factors in conjunction with the fact that APRA has available to it a mechanism for the resolution of the issues surrounding the contingent debt, I consider that it would not be a proper exercise of discretion to make an order for substitution pursuant to s 465B of the Corporations Act. Accordingly, I dismiss the interlocutory process. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 16 June 2011