FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v NOPSA Pty Ltd [2015] FCA 1126 Citation: Deputy Commissioner of Taxation v NOPSA Pty Ltd [2015] FCA 1126 Parties: DEPUTY COMMISSIONER OF TAXATION and LEIGH PRIOR IN HIS CAPACITY AS LIQUIDATOR OF NOPSA PTY LTD (IN LIQUIDATION) v NOPSA PTY LTD ACN 153 714 768, ROCCO MUSOLINO and SILVANA MUSOLINO) File number: SAD 232 of 2015 Judge: WHITE J Date of judgment: 7 October 2015 Catchwords: CORPORATIONS – insolvency – winding up order made against the defendant in defendant's absence – application to have winding up order set aside – whether Court should exercise its discretion to set aside the winding up order – standing of corporation to make interlocutory application while being wound up – principles applicable to the setting aside of a winding up order Legislation: Corporations Act 2001 (Cth) ss 471A, 482 Federal Court Rules 2011 (Cth) r 39.05 Income Tax Assessment Act 1936 (Cth) Cases cited: Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171; (2001) 164 FLR 91 Deputy Commissioner of Taxation v Annesley Plant Hire Pty Ltd [2010] FCA 755 George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 15 ACLR 464 Land Enviro Corp Pty Ltd (in liq) v Hickie [2015] FCA 766 Lane Cove Council v Geebung Polo Club Pty Ltd (No 2) [2002] NSWSC 118; (2002) 167 FLR 175 Registrar of Aboriginal Corporations v Murnkurni Women's Aboriginal Corporation (in liq) [1995] FCA 1413; (1995) 58 FCR 125 Workers Compensation Nominal Insurer v Detailed Flooring Pty Ltd [2010] NSWSC 1056; (2010) 80 ACSR 1 Date of hearing: 7 October 2015 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 46 Counsel for the First Plaintiff: Ms R Smith Solicitor for the First Plaintiff: Australian Taxation Office Legal Services Branch Counsel for the Second Plaintiff: Ms N Abela Solicitor for the Second Plaintiff: Cowell Clarke Counsel for the Defendants: Mr P Britten-Jones Solicitor for the Defendants: Brian Deegan Lawyers IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 232 of 2015 BETWEEN: DEPUTY COMMISSIONER OF TAXATION First Plaintiff LEIGH PRIOR IN HIS CAPACITY AS LIQUIDATOR OF NOPSA PTY LTD (IN LIQUIDATION) Second Plaintiff AND: NOPSA PTY LTD ACN 153 714 768 First Defendant ROCCO MUSOLINO Second Defendant SILVANA MUSOLINO Third Defendant JUDGE: WHITE J DATE OF ORDER: 7 OCTOBER 2015 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. Pursuant to r 39.05(a) of the Federal Court Rules 2011 (Cth), the orders made by the Registrar on 26 August 2015 that the Defendant, NOPSA Pty Ltd, be wound up and that Leigh Prior be appointed as its liquidator be set aside. 2. The application for the winding up of NOPSA Pty Ltd filed on 21 July 2015 be dismissed. 3. The Plaintiffs in the interlocutory process filed on 1 September 2015 and amended on 14 September 2015 are to pay the costs of the Deputy Commissioner of Taxation in relation to the application for winding up, fixed by consent at $2,466, and otherwise there be no order with respect to the costs of the Deputy Commissioner. 4. There be no order as to costs on the amended interlocutory application filed on 15 September 2015. 5. The Plaintiffs in the interlocutory application filed on 1 September 2015 and amended on 14 September 2015 are to pay the liquidator's reasonable costs, remuneration, fees and expenses of the liquidation of NOPSA Pty Ltd, with liberty to all parties to apply in the event of any dispute as to the quantification of those costs. 6. There be liberty to apply generally. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 232 of 2015 BETWEEN: DEPUTY COMMISSIONER OF TAXATION First Plaintiff LEIGH PRIOR IN HIS CAPACITY AS LIQUIDATOR OF NOPSA PTY LTD (IN LIQUIDATION) Second Plaintiff AND: NOPSA PTY LTD ACN 153 714 768 First Defendant ROCCO MUSOLINO Second Defendant SILVANA MUSOLINO Third Defendant JUDGE: WHITE J DATE: 7 OCTOBER 2015 PLACE: ADELAIDE EX TEMPORE REASONS FOR JUDGMENT 1 On 26 August 2015, this Court ordered, on the application of the Deputy Commissioner of Taxation, that NOPSA Pty Ltd (NOPSA) be wound up in insolvency and that the second plaintiff, Mr Prior, be appointed as its liquidator. 2 Six days later, on 1 September 2015, NOPSA applied for an order, amongst other things, that the winding up be set aside. That application, having been brought without the Court's approval, was irregular. At the first case management hearing, the Court granted leave in that circumstance to the shareholders of NOPSA, Mr Rocco Musolino and Mrs Silvana Musolino, to be joined as defendants to the action and as co-applicants for the setting aside of the winding up order. Mrs Musolino is the sole director of NOPSA. At the same hearing, the Court also granted leave for Mr Prior to be joined as a party to the proceedings. 3 The application was brought pursuant to r 39.05 of the Federal Court Rules 2011 (Cth). That rule permits the Court to vary or set aside an order after it has been entered if, amongst other things, the order was made in the absence of a party. That was the circumstance here as, for reasons to be explained shortly, NOPSA was not present at the hearing on 26 August 2015. The defendants relied in the alternative, on s 482 of the Corporations Act 2001 (Cth) which permits the Court to stay a winding up, either permanently or for a limited time. 4 The standing of Mr and Mrs Musolino as shareholders of NOPSA to bring the application has not been challenged. Accordingly, at least insofar as the application is brought by them, there is a proper application before the Court. 5 There is a question as to whether NOPSA can itself apply for the setting aside of the orders made on 26 August, given the effect of the order for its winding up. With a view to addressing that question, the defendants seek the approval by the Court, pursuant to s 471A(1A) of the Corporations Act, for NOPSA to bring their interlocutory application. 6 Section 471A(1) precludes a person such as a director from performing or exercising a function or power as an officer of a company while the company is being wound up. Subsection (1A) qualifies that prohibition by permitting a director to perform a power or function with, amongst other things, the liquidator's written approval or with the written approval of the Court. The defendants do not have Mr Prior's approval. 7 The circumstance that the defendants did not seek the Court's approval prior to filing the application gives rise to an issue as to whether the Court may grant that approval retrospectively. 8 On that question, there are conflicting authorities. In Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171; (2001) 164 FLR 1, Barrett J held that the Court does have the power to grant approval retrospectively: [24] It seems to me, however, that special considerations apply where the matter at hand is a challenge to the winding up order. There, as I have said, the liquidator is in the odd position of having to decide whether to challenge the order which effected his or her appointment. That difficulty was previously resolved by reference to the residual power of directors but is now dealt with through s 471A(1)(d). It follows, in my judgment, that action by directors to have the company appeal against the winding up order or otherwise to seek to have it overturned is not something to which the liquidator's primary decision making function is intended to apply. The court may therefore proceed to decide whether to approve such action by directors without being concerned that the views of the liquidator are not before it. [25] Whatever may be the effect of s 471A in other contexts, I regard a matter such as the present as within the third class referred to by Glass JA in (National Mutual Fire Insurance). If the directors cause the company to initiate an appeal against or other challenge to the winding up order, the application is in a state of "suspended validity" which may be resolved by the grant of s.471A(1)(d) approval nunc pro tunc. Indeed, I note that, in Vynotas Pty Ltd v Mystic Crystals Franchises (Australia) Pty Ltd [1999] QCA 473, an application for s 471A(1)(d) approval was entertained after an appeal by the company against the winding up order had reached the Court of Appeal. 9 Barrett J followed his own decision in Brolrik in the later case of Workers Compensation Nominal Insurer v Detailed Flooring Pty Ltd [2010] NSWSC 1056; (2010) 80 ACSR 1 at [9]. See also Lane Cove Council v Geebung Polo Club Pty Ltd (No 2) [2002] NSWSC 118; (2002) 167 FLR 175 at [10]. 10 However, in Land Enviro Corp Pty Ltd (in liq) v Hickie [2015] FCA 766 at [15], Foster J expressed the view that the approval of the Court for the exercise of a function or power by an officer of a company in liquidation should be sought and obtained before the performance or exercise of the relevant function or power. His Honour reached that conclusion despite a concession by counsel for the respondents, supported by reference to authority, that the approval could be given by the Court even after the officer has purported to exercise the power. 11 It is not necessary on the present application to decide between those authorities because, as I have indicated, there is in any event a valid application before the Court now that Mr and Mrs Musolino have been joined as defendants and have joined in the insolvency application. For the same reason, it is not necessary to determine the application for the approval. Background 12 NOPSA's registered office is at 6 King Street, Norwood, South Australia, the office of its former accountant, Solutus Accounting. The principal of that firm is Mr David Capone. Solutus Accounting was retained by NOPSA as its accountant generally and, in particular, to prepare and file its taxation returns, financial statements and business activity statements. NOPSA relied on Solutus Accounting to perform those tasks and has done so from the time of its incorporation in 2011. 13 The evidence discloses that Solutus Accounting has not performed a number of these tasks, dating back, it seems, to the 2013 financial year. In particular, Solutus Accounting does not appear to have performed tasks pursuant to its retainer since the middle of 2014. I make that finding on the basis of the evidence of Mr and Mrs Musolino and, to a lesser extent, in reliance on the affidavit of their new accountant, Ms Zappia. No challenge was made to their evidence on the present application. I add, however, that the Court has not received any evidence from Mr Capone or Solutus Accounting and so I refrain from making any finding which involves an allocation of blame. It would be inappropriate to do so, given that neither Solutus Accounting nor Mr Capone have been given an opportunity to be heard in these proceedings. It is sufficient that I record my satisfaction that tax returns, business activity statements and remittances of tax have not been lodged by NOPSA with the Australian Taxation Office and that by May this year, NOPSA had accrued a liability for unpaid tax in the sum of $182,805.19. 14 Each of the Deputy Commissioner of Taxation and Mr Prior were inclined to be critical of Mr and Mrs Musolino for not themselves, and independently of Solutus Accounting, attending to payment of the tax. It may be that in retrospect it can be said that they could have done more, but the firm impression I have on the evidence is that Mr and Mrs Musolino relied, as so many small business owners do, on their accountant to carry out the accounting functions on their behalf in a responsible and diligent manner and to inform them of their taxation liabilities. 15 On 8 May 2015, the Deputy Commissioner of Taxation caused a creditor's statutory demand to be served on NOPSA. Service was effected by posting the demand and the supporting affidavit to NOPSA's registered address, that is to say, the office of Solutus Accounting at 6 King Street, Norwood. NOPSA did not pay the amount demanded or any part of it and did not secure payment of the debt to the Australian Taxation Office. 16 Accordingly, on 21 July, the Deputy Commissioner applied for the winding up of NOPSA on the grounds of its insolvency. The application was listed for hearing on 26 August. Notice of the application and of the hearing date were published on the ASIC website and copies of the documents were posted to NOPSA, again, at its registered address. 17 NOPSA did not attend the hearing on 26 August and the order for its winding up was made. 18 The explanation which Mr and Mrs Musolino have provided for their being unaware of the winding-up application has not been challenged. It is simply that they had not been informed of the creditor's demand or of the winding-up application by Solutus Accounting and had not otherwise been made aware of it. 19 I accept Mrs Musolino's evidence that she first learnt of the application for the winding up and the order made by this Court on the following day, 27 August, when she received an email from Mr Prior's firm informing her that NOPSA had been placed into liquidation. I also accept Mr Musolino's evidence that he first learned of those events when he was told of them by his wife. In other words, Solutus Accounting had not told them of the application or of the creditors' statutory demand. 20 On the day after learning of the winding up order, Mr Musolino went to 6 King Street, Norwood. He observed that the building had the appearance of being unoccupied with overflowing, uncollected mail and broken windows. It appeared that Mr Capone had abandoned the premises. 21 It is accordingly understandable that that there was no attendance by or on behalf of NOPSA at the hearing on 26 August. 22 It is appropriate to record that Mr and Mrs Musolino had not been inactive in attempts to contact Solutus Accounting before 26 August. Mrs Musolino was accustomed to having contact with Mr Capone periodically, as she did the bookkeeping for the business conducted by NOPSA. She was last able to speak to Mr Capone in April 2015. That was in relation to her concerns that neither NOPSA's nor their own personal taxation returns had been filed. Mrs Musolino deposes, and I accept, that Mr Capone responded at that time with words to the effect that the returns would be prepared shortly. Since that time, Mrs Musolino has attempted to contact Mr Capone on numerous occasions without success. Mrs Musolino was frustrated by the lack of responses from Mr Capone. The email communications from her to Mr Capone evidence that frustration and it is fair to describe her requests and demands of Mr Capone as becoming more and more strident as the weeks went by. 23 Mr Musolino had also made attempts to prompt Mr Capone into action. He did this by a text message sent to Mr Capone on 31 July, to which he received a reply, but his follow-up text messages on 2, 3 and 4 August went unanswered. 24 The Musolinos have since retained another account, Ms Zappia, to attend to their outstanding tax matters. They did that on 28 August. Their retainer of Solutus Accounting terminated at the same time. 25 NOPSA was incorporated on 13 October 2011. Until the order for its winding up on 26 August, NOPSA's sole function was that as trustee of the AJNS Family Trust. NOPSA was also one of the named beneficiaries of that trust. 26 Until 7 November 2014, the AJNS Family Trust was the sole owner of two businesses which traded under the names Natural Organics Plus SA and Silvarock Transport respectively. On 8 November 2014, NOPSA as trustee of the AJNS Family Trust, sold 50% of the business of Natural Organics Plus SA to Red Piazza Pty Ltd, as trustee for the R&R Russo Family Trust. Since that date the business of Natural Organics Plus SA has been conducted by a partnership between NOPSA and Red Piazza Pty Ltd, each in their respective capacities as trustee. 27 By reason of cl 19(c) of the AJNS Family Trust, NOPSA ceased as trustee immediately upon the making of the orders for its winding up. Mr Musolino has since been appointed as trustee of the AJNS Family Trust, and the partnership business continues. That is a business as a wholesaler of fresh produce operating from the Pooraka markets. The business, as I understand it, operates principally in South Australia but also involves activities in the other States of Australia. Mr Musolino is the person who is engaged in the day to day management of both businesses and Mrs Musolino attends to their bookkeeping functions. Relevant principles 28 The principles relating to the exercise of the court's powers under rule 39.05 in circumstances like the present are reasonably settled. In George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 15 ACLR 464, Hodgson J said that an order for the setting side of a winding up order will normally be made if the following six conditions are satisfied: (a) The order is made in the absence of the defendant company; (b) An application for the setting aside is brought promptly by the company; (c) Notice is given to the liquidator, to the person who sought to have the company wound up, and to any creditor who appeared at the hearing; (d) The evidence shows an explanation for the non-appearance; (e) There is consent or at least no opposition to the setting aside; and (f) The liquidator shows there is nothing in his investigations to date showing a reason for the company to be stopped from trading. 29 It is to be observed that in George Ward Steel, the liquidator consented to the setting aside of the winding up order. Later authorities show that the attitude of the liquidator on an application of this kind is a relevant consideration, but not conclusive: Deputy Commissioner of Taxation v Annesley Plant Hire Pty Ltd [2010] FCA 755 at [13]. 30 The authorities also show that it is not necessary for an applicant to establish that the company is in fact solvent, only that the evidence indicates solvency: Annesley Plant Hire at [12]; Registrar of Aboriginal Corporations v Murnkurni Women's Aboriginal Corporation (in liq) [1995] FCA 1413 at [12], (1995) 58 FCR 125 at 128. Barrett J in Detailed Flooring at [35] said that there had to be an "arguable case" of solvency. Consideration 31 There is no issue in the present case about a number of the elements identified by Hodgson J. The winding up order was made in the absence of NOPSA; the application has been brought promptly; the appropriate notices have been given; and, in my opinion, the defendants have shown a proper explanation for the non-attendance at the hearing on 26 August. 32 The Deputy Commissioner's attitude to the application is one of non-consent but non-opposition. The Deputy Commissioner did, however, point to the circumstance that NOPSA has had an outstanding liability for tax dating back to December 2013 with no attempts having been made to reduce that liability, and submitted that that was a factor which was relevant to the exercise of the Court's discretion. I am willing to accept that that is so, because it may, for example, indicate an indifference by the defendants to the discharge of their taxation liabilities. However, given that it appears that Mr and Mrs Musolino were heavily reliant on their accountant, I do not regard this as being a significant consideration. 33 Mr Prior opposes the setting aside of the winding up order. It was open to him to do so. I observe, however, as did Finkelstein J in the Annesley Plant Hire, that a liquidator in Mr Prior's position has a duty to act impartially. While it is appropriate for a liquidator to bring to the Court's attention relevant matters bearing upon the exercise of the power under r 39.05, it is undesirable for the liquidator to become an active protagonist. Some of the submissions made on the present liquidator's behalf seemed, in my view, to be in the nature of submissions from a person adopting such a position. 34 Mr Prior has deposed that he does not regard the material provided by the defendants as indicating that NOPSA is solvent. He takes that view because the defendants have not provided financial statements for NOPSA beyond the financial year ending 30 June 2013, and because financial statements for the AJNS Family Trust and the partnership operating the business of Natural Organics Plus SA and Silvarock Transport have not been provided beyond the year ending 30 June 2014. Mr Prior is correct in this submission but it is fair to note that two affidavits from Ms Zappia which sought to address some of these shortcomings were not received only because of Mr Prior's objection based on the lateness of their delivery to him. 35 Mr Prior's submissions also referred to a notice issued to Mrs Musolino in June 2014 containing her tax assessment. It was said that this notice evidenced in some way dilatory behaviour by Mr and Mrs Musolino or by NOPSA. I do not understand how that can be so, bearing in mind that that assessment related to Mrs Musolino personally and not NOPSA, and there is no evidence at all before the Court indicating when that tax liability was paid. The Court could not conclude that Mrs Musolino had been late in making that payment. 36 Mr Prior drew the Court's attention to a number of other matters which may bear on NOPSA's solvency. He noted that there may be a liability for tax pursuant to Div 7A of the Income Tax Assessment Act 1936 (Cth) arising, as I understand it, from the deemed dividend provisions; that there may be a capital gains tax liability arising from the sale of a 50% share in the business of Natural Organics Plus SA in November 2014; that there may be stamp duty liabilities which have not been met; that there may be interest penalties and late lodgement fees; that the affidavit material from the defendants does not address these matters; and that there may be yet further liabilities which have not yet been quantified. The submissions concerning those matters were put at a level of generality and seemed to involve, with all respect to Mr Prior, some speculation. 37 In considering the significance to be attached to these submissions, it is particularly pertinent, in my opinion, that Mr Prior has not deposed to any matters which he has learnt from his investigations to date as liquidator of NOPSA, to any concerns revealed by those investigations, or to circumstances which may indicate that the matters about which he has speculated may become the reality. It is also pertinent that the Deputy Commissioner is a party to these proceedings and has, by one of his officers, deposed to the current outstanding taxation liability of NOPSA to the Taxation Office, namely, an amount of $211,251.67. 38 Weighed against the matters raised by Mr Prior, there are a number of matters which suggest at least an arguable case for NOPSA's solvency. The evidence of Mr and Mrs Musolino and Ms Zappia indicates that all of the trade creditors of NOPSA as at 28 September 2015 have been paid in full. Mr and Mrs Musolino have provided their solicitors with a bank cheque made payable to the Deputy Commissioner of Taxation for the amount of $182,805.19, being the amount which was the subject of the creditors' statutory demand. The solicitor was advised by the solicitor for the Deputy Commissioner to maintain possession of the cheque until further advice, because of the practice of the Deputy Commissioner not to accept payment of outstanding tax until the returns due in respect of later periods have been lodged. But on my understanding, were it not for that self-imposed limitation by the Commissioner, the bank cheque would have been delivered either to the liquidator or to the Deputy Commissioner by now. I note that Mr Prior has now requested delivery to him forthwith of the bank cheque and that the defendants' solicitor has indicated a willingness to do so. 39 The defendants have agreed the costs of the Deputy Commissioner ordered by this Court on 26 August and have agreed to pay the reasonable costs of the liquidator in the liquidation. 40 The current liabilities of NOPSA revealed by the evidence are a liability to the Australian Taxation Office of $211,000, and Mr Prior has provided an estimate of $42,000 for the work which he has performed as liquidator since 26 August 2015. Against those liabilities, the evidence indicates that, in addition to the bank cheque of $182,000, NOPSA holds approximately $60,000 in its bank accounts, and its solicitors hold approximately $8,000 in their trust account. That sum of $8,000 is apparently available to meet NOPSA's debts. 41 Thus it appears that NOPSA has a current ability to pay its known current liabilities. As the former trustee of the AJNS Family Trust, NOPSA has, of course, a right of indemnity against the assets of the trust and has a lien which it can enforce against those assets in support of its right of indemnity. The financial statements for the AJNS Family Trust for the period ending 30 June 2014 have been completed by Ms Zappia. They show that the trust traded profitably in the 2014 year, had profits before income tax in that year from its ordinary activities of some $477,000 and net equity of a like amount. This suggests that the right of indemnity is not likely to be illusory in practice. 42 Although Ms Zappia has been retained only recently, she has carried out a considerable amount of work preparing financial statements and taxation returns for NOPSA and for the trust, as well as outstanding business activity statements. It is evident that Ms Zappia is proceeding with expedition to regularise the accounting aspects of NOPSA's affairs. It is also evident that Ms Zappia has acquired as a result of this work some familiarity with the business of NOPSA and of the AJNS Family Trust. She has deposed to her belief that the trust appears to be solvent as at 30 June 2015 and, further, that she has not seen any indication of insolvency: [23] ... I have examined the creditor's detailed ledger and noted that prompt payment of suppliers is normal practice for the business. I have also examined the bank statements and noted that there is a strong continual flow of deposits from customers into the business cheque account and corresponding payments to creditors. The balance in the account varies between $30,000.00 and $75,000.00. 43 All of these matters are, in my opinion, indications of solvency and make out an arguable case of solvency. 44 Mr Prior, on the other hand, says in an affidavit sworn on 2 October: [4] I have formed the view that the 28 September Affidavits and the documents annexed to those affidavits do not establish that the Company is solvent now and going forward, and accordingly, I do not consent to the orders sought by the applicant. I note, however, that Mr Prior has not particularised the basis for that bare opinion, and does not address the particular matters to which Ms Zappia has drawn attention in support of her view that there are no indications of insolvency. In that circumstance, I think it appropriate to attach greater weight to Ms Zappia's opinion rather than to that of Mr Prior. 45 Mr Prior also referred to some other matters which I understood to be in the nature of general discretionary considerations. For example, he submitted that the taxation return for NOPSA in respect of the financial year ending on 30 June 2012 had not been lodged until 29 May 2014 and, as already noted, attached significance to a notice issued to Mrs Musolino in her personal capacity in June 2014. For the reasons already given, the second is not a material matter and, in my opinion, the first does not weigh heavily in the balance. It may be the case that in the past NOPSA has not always given the attention to its taxation affairs which it should. I am not in a position to express a view about that. But even if it be the case, it does not seem to me to be a significant consideration bearing upon the exercise of the discretion under r 39.05 in the present case, given the indications of NOPSA's solvency, and the significant steps being taken now to regularise its taxation affairs. 46 I am satisfied that the defendants have demonstrated that it is appropriate for the order for winding-up to be set aside pursuant to r 39.05. I will make an order to that effect, and will hear from the parties as to any consequential orders which may be appropriate. That being so, it is not necessary for the Court to address the alternative application made pursuant to s 482 of the Corporations Act. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White. Associate: Dated: 22 October 2015