FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v Caporale Group Pty Ltd [2011] FCA 1189 Citation: Deputy Commissioner of Taxation v Caporale Group Pty Ltd [2011] FCA 1189 Parties: DEPUTY COMMISSIONER OF TAXATION v CAPORALE GROUP PTY LTD (ACN 112 978 408) DEPUTY COMMISSIONER OF TAXATION v ELITE PROJECT MANAGEMENT PTY LTD (ACN 097 586 340) DEPUTY COMMISSIONER OF TAXATION v MOSSIMO SYSTEMS INTERNATIONAL PTY LTD (ACN 112 914 039) DEPUTY COMMISSIONER OF TAXATION v INTEGRATED CONSTRUCTIONS PTY LTD (ACN 098 051 908) DEPUTY COMMISSIONER OF TAXATION v HORIZON DEVELOPMENTS SYDNEY PTY LTD (ACN 112 978 300) DEPUTY COMMISSIONER OF TAXATION v PRECISE CONSTRUCTIONS SYDNEY PTY LTD (ACN 087 532 232) DEPUTY COMMISSIONER OF TAXATION v CAPORALE BUILDERS PTY LTD (ACN 113 202 092) DEPUTY COMMISSIONER OF TAXATION v MATRIX HOLDINGS PTY LTD (ACN 087 532 232), DEPUTY COMMISSIONER OF TAXATION v CAPITAL HOLDINGS AUSTRALIA PTY LTD (ACN 097 708 837) DEPUTY COMMISSIONER OF TAXATION v ROSE CORPORATION PTY LTD (ACN 107 319 139) File number(s): NSD 241 of 2011, NSD 243 of 2011 NSD 245 of 2011, NSD 246 of 2011 NSD 247 of 2011, NSD 248 of 2011 NSD 547 of 2011, NSD 548 of 2011 NSD 1182 of 2011, NSD 1183 of 2011 Judge: YATES J Date of judgment: 18 October 2011 Catchwords: CORPORATIONS – application to adjourn hearing of winding up proceedings – where no evidence of solvency Legislation: Corporations Act 2001 (Cth) ss 286, 459C(2)(a), 459E, 459P, 459Q, 459S Evidence Act 1995 s 190(3)(b) Income Tax Assessment Act 1936 (Cth) s 177(1) Taxation Administration Act 1953 (Cth) s 14ZZR Cases cited: Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 Deputy Commissioner of Taxation v Mackey (1982) 45 ALR 284 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Shmee Pty Ltd v Bresam Investments Pty Ltd [2009] VSC 657 Date of hearing: 18 October 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 32 Counsel for the Plaintiff: Mr A O'Brien Solicitor for the Plaintiff: Australian Taxation Office Counsel for the Defendants: Mr I Young Solicitor for the Defendants: Peter Papadopoulos & Co Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 241 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: CAPORALE GROUP PTY LTD (ACN 112 978 408) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 243 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ELITE PROJECT MANAGEMENT PTY LTD (ACN 097 586 340) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 245 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: MOSSIMO SYSTEMS INTERNATIONAL PTY LTD (ACN 112 914 039) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 246 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: INTEGRATED CONSTRUCTIONS PTY LTD (ACN 098 051 908) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 247 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: HORIZON DEVELOPMENTS SYDNEY PTY LTD (ACN 112 978 300) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 248 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: PRECISE CONSTRUCTIONS SYDNEY PTY LTD (ACN 087 532 232) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 547 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: CAPORALE BUILDERS PTY LTD (ACN 113 202 092) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 548 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: MATRIX HOLDINGS PTY LTD (ACN 087 532 232) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1182 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: CAPITAL HOLDINGS AUSTRALIA PTY LTD (ACN 097 708 837) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1183 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ROSE CORPORATION PTY LTD (ACN 107 319 139) Defendant JUDGE: YATES J DATE OF ORDER: 18 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant's application for adjournment be refused. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 241 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Applicant AND: CAPORALE GROUP PTY LTD (ACN 112 978 408) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 243 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ELITE PROJECT MANAGEMENT PTY LTD (ACN 097 586 340) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 245 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: MOSSIMO SYSTEMS INTERNATIONAL PTY LTD (ACN 112 914 039) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 246 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: INTEGRATED CONSTRUCTIONS PTY LTD (ACN 098 051 908) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 247 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: HORIZON DEVELOPMENTS SYDNEY PTY LTD (ACN 112 978 300) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 248 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: PRECISE CONSTRUCTIONS SYDNEY PTY LTD (ACN 087 532 232) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 547 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: CAPORALE BUILDERS PTY LTD (ACN 113 202 092) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 548 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: MATRIX HOLDINGS PTY LTD (ACN 087 532 232) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1182 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: CAPITAL HOLDINGS AUSTRALIA PTY LTD (ACN 097 708 837) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1183 of 2011 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ROSE CORPORATION PTY LTD (ACN 107 319 139) Defendant JUDGE: YATES J DATE: 18 OCTOBER 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 Each of the defendants sought an adjournment of winding up proceedings commenced against it by the Deputy Commissioner of Taxation. 2 After receiving evidence and hearing argument, I refused, in each case, to grant the adjournment that was sought. At the time I informed the parties that I would publish reasons for my decision. These are my reasons. Background 3 At the time of hearing the adjournment applications each defendant was presumed to be insolvent, based on its failure to comply with a demand served upon it by the plaintiff pursuant to s 459E of the Corporations Act 2001 (Cth) (the Act). Each statutory demand was based on a tax debt. 4 The plaintiff's winding up proceedings against the various defendants were commenced in the period 7 March 2011 to 19 July 2011. Previously adjournments of each winding up proceeding had been granted from time to time. 5 When the matter came before me the substantive basis for the adjournments that were sought was that, in each case, the defendant had commenced proceedings (the appeal proceedings) in the Administrative Appeals Tribunal (the AAT) under Part IVC of the Taxation Administration Act 1953 (Cth) (the TAA) disputing its tax debt. Directions hearings in the appeal proceedings had been held. On 25 August 2011 directions which had been previously made in each appeal proceeding on 1 July 2011 were vacated and further directions were made providing that: (a) on or before 6 October 2011 the relevant defendant (as applicant in the appeal proceeding) serve its evidence; and (b) on or before 20 October 2011 the relevant defendant file and serve its statement of facts, issues and contentions. 6 The defendants have filed their evidence in the appeal proceedings, as directed on 25 August 2011. However, they have not filed their statements of facts, issues and contentions, the time for doing so not having expired. 7 Each defendant's application before me was that the winding up proceeding against it should be adjourned until the determination of its appeal proceeding or, alternatively, until after its statement of facts, issues and contentions had been filed in its appeal proceeding. 8 The plaintiff, in each case, objected to the adjournment that had been sought. The plaintiff's submissions 9 The plaintiff's objection to the granting of any further adjournments in the winding up proceedings was based on the following submissions. 10 First, in each case, the defendant had not established that it would be solvent, but for the tax debt. The plaintiff accepted that, where a winding up is based on a tax debt the subject of an appeal under Part IVC of the TAA, the Court has a discretion as to whether to make a winding up order. A relevant consideration in that regard is whether the defendant has "a reasonably arguable case" in the appeal proceeding: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at [13]. 11 The plaintiff submitted, however, that one only gets to the point of considering that question if satisfied that, but for the tax debt, the defendant would be solvent. If a defendant is insolvent, it should be wound up in insolvency. The fact that the statutory demand giving rise to the presumed insolvency is based on a tax debt is of no consequence. 12 In this connection the plaintiff submitted that the onus of establishing solvency rests on the defendants. In the discharge of this onus courts, generally speaking, have insisted on the "fullest and best" evidence of the financial position of the company: see, for example, Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 at [4] and [16]; cf Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 at [11]-[15] which suggests the application of a lesser requirement, depending on circumstances. 13 Secondly, the plaintiff submitted, in each case, that, even if the defendant was solvent but for its tax debt, the defendant had adduced no evidence and advanced no argument to establish that it had a "reasonably arguable case" in its appeal proceeding. Consideration 14 In my view, both submissions should be accepted. They stand as cogent reasons why the applications for adjournment should be refused. 15 The inevitable consequence of each defendant failing to comply with the demand served on it is that, by operation of s 459C(2)(a) of the Act, it is presumed to be insolvent. That is so, regardless of the nature or character of the debt on which the statutory demand is based. In short, it makes no difference, for this purpose, that the debt is a tax debt. 16 Further, the presumed state of affairs is not qualified by the amount of the debt. In other words, the presumption is not that, but for that debt, the company would be solvent. Rather, the presumption is simply that the company is insolvent, rendering it liable to be wound up in insolvency in accordance with ss 459P and 459Q of the Act. The grounds on which a company, in those circumstances, can oppose the application for winding up are limited and subject to leave being granted: s 459S(1). The court is not to grant leave unless it is satisfied that the ground is material to proving that the company is solvent: s 459S(2). Thus, establishing the solvency of the company assumes particular importance in defending proceedings of the present kind. 17 The defendants submitted that the question of their solvency was "not an issue". They submitted that the only issue was the question of their respective entitlements to pursue the appeal proceedings. 18 In this connection the defendants relied on the "Ahern principle" (Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137), namely that a sequestration order (here, a winding up order) should not be made where an appeal is pending against the judgment relied on as the foundation for the bankruptcy proceedings (here, the winding up proceedings) if the appeal is based on genuine and arguable grounds. The defendants relied on Shmee Pty Ltd v Bresam Investments Pty Ltd [2009] VSC 657 for the application of that principle in the case of winding up proceedings. 19 They also emphasised the character of the debt, in each case, as a tax debt. They drew attention to s 177(1) of the Income Tax Assessment Act 1936 (Cth) (the ITAA) which provides that: The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. 20 They also drew attention to s 14ZZR of the TAA which provides that: The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending. 21 The defendants drew attention to these provisions to illustrate the practical impossibility of challenging the statutory demands that had been served on them. Also, although the provisions of s 14ZZR of the TAA do not deprive a court of the jurisdiction to grant a stay in an appropriate case, great weight must be attached to the policy inherent in those provisions in relation to the recoverability of tax debts: Deputy Commissioner of Taxation v Mackey (1982) 45 ALR 284 at 286. 22 While the existence of the appeal proceedings is plainly a relevant and important factor to be taken into account in considering the adjournment applications, it is not the only factor. I do not accept the defendants' submission that the question of their solvency is "not an issue". In my view, it too is a relevant and important factor to be taken into account. Indeed, it is at the forefront of considerations. 23 In this regard, there is little point in putting off the winding up applications to a time after the determination of the appeal proceedings, or even for a shorter period of time, if the defendants are insolvent, regardless of the tax debts they owe. In the absence of appropriate evidence establishing their solvency, or their solvency but for the tax debts, the Court is required to presume, in the present circumstances, that the defendants are insolvent. 24 By way of amplification of the circumstances in the present case, none of the defendants was able to provide any evidence of solvency by way of financial records that recorded or explained its transactions and financial position and performance: see s 286(1) of the Act. I simply have no idea of the financial circumstances of each defendant other than that it is presumptively insolvent and owes a significant debt to the plaintiff. 25 The defendants' own evidence is that it would take approximately eight months to gather information and prepare financial statements for all of them. The defendants' evidence was that, after that was done, it would take, approximately, another four months to obtain reports from a tax expert and a solvency expert (a period, in total, of approximately one year). Quite apart from indicating that the defendants have failed to comply with their obligations under s 286 of the Act with respect to the keeping of financial records, this evidence shows that none of the defendants is in any realistic position to establish, and cannot establish, its solvency. And yet, apparently, the defendants continue to trade. 26 Furthermore, even though the defendants' respective statements of facts, issues and contentions are due to be filed in the appeal proceedings by 20 October 2011, the defendants did not seek to advance, in the adjournment applications, the matters which they say indicate that they have a reasonably arguable case in those proceedings. The only material I have before me is evidence of the fact that the appeal proceedings have been commenced and that the defendants have filed the evidence on which they propose to rely. However, those facts alone provide no basis on which I could conclude that each defendant has a reasonably arguable case in respect of its appeal in the AAT. 27 In this connection, the defendants submitted that the plaintiff had not adduced evidence that the appeals were "in any manner frivolous or vexatious or otherwise misconceived or lacking in substance". It is true that the plaintiff has not adduced evidence to that effect. But the defendants' submission simply misses the point that it was incumbent on each of them to satisfy the Court that it had a reasonably arguable case on its appeal before the AAT. 28 In the absence of each defendant articulating the basis for its appeal, such as by tendering and relying on its statement of facts, issues and contentions, or by making submissions before me to the same effect, I place little weight on the fact that the plaintiff itself has not adduced evidence of the kind to which the defendants refer. 29 Indeed, given that the defendants are currently required to file their statements of facts, issues and contentions in the appeal proceedings by no later than 20 October 2011, it is telling that the defendants were apparently unable to, or otherwise decided not to, articulate the basis of their appeals in the course of arguing the adjournment applications. 30 At the conclusion of argument, I enquired of the defendants' counsel whether, should an adjournment not be granted, the defendants wished to raise any additional arguments on the hearing of the winding up applications. I was informed that the defendants did not intend to raise any additional argument. 31 Finally, during the hearing of the adjournment applications, I deferred ruling on paragraph 9 of the affidavit of Peter Papadopoulos sworn 7 September 2011. The effect of that paragraph was that, as the solicitor for the defendants, he had been instructed that the matters in dispute involving the defendants Capital Holdings Australia Pty Ltd and Rose Corporation Pty Ltd were presently awaiting listing for a directions hearing in the AAT. Objection was taken to that evidence on the basis that it was hearsay. I have considered that objection and reject it on discretionary grounds: s 190(3)(b) of the Evidence Act 1995 (Cth). I have taken that evidence into account along with the other evidence tendered by the defendants in considering their adjournment applications. Disposition 32 After refusing the adjournment applications I proceeded to hear and determine the winding up proceedings. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 20 October 2011