FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v Bean Temple Pty Ltd [2017] FCA 674 File number: NSD 344 of 2017 Judge: GLEESON J Date of judgment: 25 May 2017 Date of publication of reasons: 15 June 2017 Catchwords: CORPORATIONS – application to wind up company in insolvency – interlocutory application under s 440A(2) of the Corporations Act 2001 (Cth) for adjournment of winding up application refused by Registrar – application for review of Registrar's decision pursuant to s 35A(6) of the Federal Court of Australia Act 1976 (Cth) – where adjournment sought to enable creditors to consider a proposed deed of company arrangement – where new evidence brought subsequent to order for winding up of company – application for review of Registrar's decision granted Legislation: Corporations Act 2001 (Cth) Federal Court of Australia Act 1976 (Cth) Income Tax Assessment Act 1997 (Cth) Cases cited: Deputy Commissioner of Taxation v Laguna Australia Airport Pty Ltd, re Laguna Australia Airport Pty Ltd (admin apptd) [2013] FCA 1271 Deputy Commissioner of Taxation v Starpicket Pty Ltd (No 2) [2013] FCA 699 Deputy Commissioner of Taxation v WPS Motor Sport Pty Ltd [2009] FCA 476; (2009) 71 ACSR 640 In the matter of Denham Constructions Pty Limited (2016) NSWSC 1426 TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830 Date of hearing: 24 May 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 38 Solicitor for the Plaintiff: Mr CBW Bavin of Hunt & Hunt Counsel for the Defendant: Mr J Svehla ORDERS NSD 344 of 2017 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: BEAN TEMPLE PTY LTD ACN 142 981 539 Defendant JUDGE: GLEESON J DATE OF ORDER: 25 May 2017 THE COURT ORDERS THAT: 1. Orders 1, 2 and 3 of the orders of District Registrar Wall on 24 May 2017 be set aside. 2. Pursuant to s 35A(6) of the Federal Court of Australia Act 1976 (Cth) and s 440A(2) of the Corporations Act 2001 (Cth), the plaintiff's application to wind up Bean Temple Pty Ltd be adjourned to 2 June 2017 before a registrar. 3. The defendant, Bean Temple Pty Ltd, pay the plaintiff's costs of the application for review of the District Registrar's orders. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 On 25 May 2017, I made orders setting aside orders made by District Registrar Wall and adjourning the application made by the plaintiff ("DCT") to wind up the defendant ("company") to 2 June 2017. 2 These are my reasons for making those orders. Background 3 The company operates a coffee shop in Sydney and has done so since about May 2012. Its directors are Edward David Howell and Brendan Tjahjadi. 4 By originating process dated 9 March 2017, the DCT applied for an order that the company be wound up in insolvency pursuant to s 459P of the Corporations Act 2001 (Cth) ("Act"). The DCT relies upon the failure of the company to comply with a statutory demand dated 30 January 2017. The debt specified in the demand is $241,333.00 comprising, primarily, a running balance account deficit of $231,553.44 as at 30 January 2017 due under the BAS provisions as defined in s 995-1(1) of the Income Tax Assessment Act 1997 (Cth), superannuation guarantee charges for four quarters in the period between 1 April 2011 and 31 March 2013, and penalties for failures to lodge returns. 5 The winding up application was originally returnable on 19 April 2017. 6 On 11 April 2017, William Hamilton ("administrator") was appointed administrator of the company by its directors. 7 On 19 April 2017, the winding up application was adjourned to 24 May 2017 on the application of the DCT. The previous day, the administrator had sworn an affidavit in which he gave evidence, relevantly: The directors of the Company are shown to be Edward David Howell and Brendan Tjahjadi. I have met with them and they have made it known to me they would like the opportunity of putting a proposal to creditors for a Deed of Company Arrangement (DOCA). They wish to retain the benefits of the lease of the premises and make an offer which will give creditors a better return then [sic] they would receive in a winding up. 8 On 24 May 2017, the winding up application was listed before District Registrar Wall. The administrator sought an adjournment pursuant to s 440A(2) of the Act to a date after 26 May 2017 to enable a proposed deed of company arrangement ("DOCA") to be put to a second meeting of creditors scheduled for 26 May 2017 at 10 am. The administrator relied, in particular, on a report to creditors pursuant to s 439A of the Act, prepared by him and dated 19 May 2017. The adjournment application was opposed by the DCT. 9 After considering the evidence and hearing submissions, the District Registrar refused the administrator's application and made the following orders: 1. BEAN TEMPLE PTY LTD ACN 142 981 539 be wound up in insolvency under the Corporations Act 2001. 2. Andrew Barnden of Rodgers Reidy be appointed as liquidator of the Defendant. 3. The Plaintiff's costs of these proceedings be fixed in the amount of $2,603 and reimbursed in accordance with sub-section 466(2) of the Corporations Act 2001. 10 On the afternoon of 24 May 2017, the administrator applied for a review of the District Registrar's decision pursuant to s 35A of the Federal Court of Australia Act 1976 (Cth). 11 The review application was heard on 25 May 2017. At the hearing, the company relied on significant additional evidence that was not tendered before the District Registrar, including modifications to the proposed DOCA. The DCT was represented by Charles Bavin, solicitor. Mr Bavin did not consent to, nor oppose, the review application but made submissions drawing to the Court's attention features of the evidence. 12 The major creditor of the company by dollar value (in the sum of $348,536.47) is Hyperbuild Pty Limited ("Hyperbuild"). Mr Costigan, group manager risk assessment, attended the review application on behalf of Hyperbuild and stated that Hyperbuild supported the proposed administrator's application. Hyperbuild wishes to vote in favour of the proposed DOCA as modified. Statutory Framework 13 Section 35A provides relevantly: (5) A party to proceedings in which a Registrar has exercised any of the powers of the Court under subsection (1) may, within the time prescribed by the Rules of Court, or within any further time allowed in accordance with the Rules of Court, apply to the Court to review that exercise of power. (6) The Court may, on application under subsection (5) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised. 14 The Court's hearing on an application for review under s 35A is a hearing de novo, at which the Court is required to rehear the case and decide the facts for itself: cf. Deputy Commissioner of Taxation v Starpicket Pty Ltd (No 2) [2013] FCA 699 at [6]. 15 Section 440A provides relevantly: (1) A company under administration cannot be wound up voluntarily, except as provided by section 446A or 446AA. (2) The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. 16 In Deputy Commissioner of Taxation v Laguna Australia Airport Pty Ltd, re Laguna Australia Airport Pty Ltd (admin apptd) [2013] FCA 1271, Gordon J explained the correct approach to the application of s 440A as follows: 10 Generally, an adjournment under s 440A(2) of the Act requires that the Court is satisfied that it is in the creditors' interests to continue the administration in all the circumstances. There must be a sufficient possibility, as distinct from mere optimistic speculation, that creditors' interests will be accommodated to a greater degree in an administration than in a winding up: Weriton Finance Pty Ltd v PNR Pty Ltd (in admin) (2012) 92 ACSR 88 at [16] and the authorities cited. 11 The onus is upon Laguna to show, by persuasive evidence, that it is in the interests of Laguna's creditors that the administration continue rather than liquidation ensue: Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1997) 26 ACSR 629 at 632-633. As McPherson JA (with whom Pincus and Davies JJA agreed) stated in Creevey and Another v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457: The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other. In order to satisfy the court of the matter referred to in s 400A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors. 12 In considering whether it is in the interests of Laguna's creditors that the Commissioner's winding up application be adjourned and the administration continue, the Court is required to act on available admissible evidence: Deputy Commissioner of Taxation v Westend Asset Pty Ltd [2013] FCA 1140 at [4]. An assessment of whether such evidence is sufficiently persuasive will depend, in part, on the circumstances in which an adjournment is sought. 13 As Campbell J (as his Honour then was) said in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (admins apptd) (2003) 44 ACSR 377 at [18]: Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase. 17 In Deputy Commissioner of Taxation v WPS Motor Sport Pty Ltd [2009] FCA 476; (2009) 71 ACSR 640 at [22], Logan J cited with approval the analysis of Hamilton J in TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830 and, in particular, the following conclusion (at [18]): What I derive from a consideration of the foregoing authorities, as perhaps appears from my reflections during their recitation, is that it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer. Evidence 18 The administrator's s 439A report shows that the company's business is operating under a lease which has been valued at $20,000 and that, otherwise, the company has no assets of any substance. 19 The report identifies the following creditors: ATO – Superannuation Guarantee Charge $ 14,627.45 ATO – Running account for BAS and PAYG $262,327.07 Hyperbuild $348,536.47 Directors Loan Account $112,008.33 Other creditors $331.20 __________ TOTAL $737,830.52 20 The administrator forecasts a nil return to creditors on a winding up. That forecast appears to be well-founded in the light of the paucity of assets: the costs of the administration to date are approximately $40,000. 21 In his report, the administrator recommended that it was in the best interests of creditors to accept the DOCA proposal that had then been made. In summary, that proposal provided for the full payments of the company's superannuation guarantee charges on the date of execution of the DOCA and payments totalling 10 cents in the dollar to the remaining creditors by weekly contributions over 12 months, with the directors being excluded creditors. 22 The modified proposed DOCA involves a payment of $90,746.92 by Jenny Howell, the mother of Edward Howell, which was made by bank cheque into the administrator's trust account. 23 The proposal is that the amount of $90,746.92 be paid out as follows: Cost of the Administrator under the Deed $5,000.00 Cost of the solicitor for the Australian Taxation Office $5,000.00 Superannuation Guarantee Charge $14,627.45 Participating Unsecured Creditors, 10c in a dollar $61,119.47 SUB-TOTAL $85,746.92 Estimated Legal Costs (subsequent to the proposal) $5,000.00 TOTAL $90,746.92 24 It is also proposed that the directors' loan account in the sum of $112,008.33 be fully written off. 25 As a result of the proposal, a fund has been created in the sum of $120,746.92 ($90,746.92 plus funds held of $30,000) which will be disbursed after costs and immediately after the execution of the DOCA, and creditors debts will be released thereafter. 26 The administrator also adduced evidence of Yiling Cao, the company's accountant since early May 2017, that outstanding income tax returns for the years 2013 to 2016 would be lodged by 26 May 2017. Based on the company's historical losses, there will be no outstanding tax liability. 27 The administrator also tendered a cash flow report prepared by Yiling Cao, which projects that the company will have a positive cash flow for the year ended 30 June 2018. 28 Concerning possible voidable antecedent transactions, the s 439A report states that: (1) there are no amounts which exceed the sum of $1,000 paid to any creditor in the relation back period; (2) there has been no transfer of assets or amounts taken from the company which may constitute a breach of a director's fiduciary duty; and (3) the administrator is not aware of any debts that the company might have incurred while insolvent, apart from the debt to the ATO. However, the administrator noted that the cost of proceeding against the directors in respect of that debt would not be justified. 29 The administrator also adduced evidence that neither of the directors has any significant assets that might justify the bringing of insolvent trading claims against them. 30 The administrator expressed the firm belief that the company can be made profitable. Consideration 31 For the following reasons, I was persuaded that it was in the best interests of creditors that the administration continue as opposed to the company being wound up in liquidation so that the proposed DOCA, as modified, could be the subject of a vote at the second meeting of creditors. 32 The majority creditor attended Court, seeking the opportunity to vote in favour of the DOCA. The DCT's position in relation to the newly proposed DOCA was not yet known. 33 The adjournment sought was only for one week. The company now has a fully funded DOCA proposal, providing a possible return of 10 cents in the dollar as against a nil return if Bean Temple is wound up. I am satisfied that the choices are between the creditors receiving nothing and an opportunity to consider the fully funded DOCA proposal which will benefit all creditors apart from the directors. 34 Mr Bavin contended that the proposed dividend under the DOCA, albeit better than nil, is negligible. In my view, Hyperbuild's attendance at Court falsified this contention. 35 Mr Bavin contended that the cash flow report tendered by the company should be viewed with scepticism, having regard to disconformities between the report and the company's profit and loss statements. Mr Bavin submitted that it must be a possible scenario that the company will continue to trade while insolvent, and the Court could not be satisfied that the company will be able to trade solvently going forward. 36 It is not necessary to be satisfied as to the company's future capacity to trade solvently in order to exercise the discretion conferred by s 440A(2). In my view, the cash flow report (prepared by the company's accountant) and the opinion of the administrator provide some grounds for optimism about the company's future capacity to trade profitably. I would not draw an inference that the company will remain insolvent. In any event, I do not consider that doubts about the company's future capacity warrant a refusal of the adjournment application. Conclusion 37 Accordingly, I set aside the orders made by the District Registrar and adjourned the DCT's application to wind up the company to permit its creditors to vote on the proposed DOCA, as modified, at a meeting of creditors to be convened on 26 May 2017. 38 The application was successful on the basis of significant evidence produced between the time of the decision of the District Registrar and the review application, which was provided with little opportunity for the DCT to obtain instructions. In those circumstances, I ordered that the company pay the DCT's costs of the review application. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 15 June 2017