FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v ST ACN116292463 Pty Limited (Subject to a Deed of Company Arrangement) [2019] FCA 38 File number: WAD 379 of 2018 Judge: COLVIN J Date of judgment: 23 January 2019 Catchwords: CORPORATIONS - application to set aside variation to deed of company arrangement under s 74-41 of the Corporations Act 2001 (Cth) - where application not opposed - where variation was only supported by related party creditors - application to terminate deed of company arrangement under s 455D of the Corporations Act - applications allowed - liquidators appointed Legislation: Corporations Act 2001 (Cth) ss 91, 445D, 499, Schedule 2 s 75-41 Date of hearing: 23 January 2019 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 15 Counsel for the Plaintiff: Mr PA Walker Solicitor for the Plaintiff: ATO Dispute Resolution Counsel for the Fifth Defendant: Mr N Siegwart Solicitor for the Fifth Defendant: Birman & Ride Counsel for the First, Second, Third, Fourth, Sixth and Seventh Defendants: The First, Second, Third, Fourth, Sixth and Seventh Defendants did not appear ORDERS WAD 379 of 2018 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ST ACN116292463 PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (FORMERLY 'STONETRADERS PTY LIMITED') (ACN 116 292 463) First Defendant JOHN SHEAHAN AND IAN LOCK IN THEIR CAPACITIES AS DEED ADMINISTRATORS OF ST ACN116292463 PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (FORMERLY 'STONETRADERS PTY LIMITED') (ACN 116 292 463) Second Defendant NOEL JOHN POLLOCK (and others named in the Schedule) Third Defendant JUDGE: COLVIN J DATE OF ORDER: 23 JANUARY 2019 THE COURT ORDERS THAT: 1. The resolution of the creditors of ST ACN116292463 Pty Limited (Subject to Deed of Company Arrangement) passed at the meeting of creditors of the company held on 19 July 2018 to the effect that the deed of company arrangement executed in respect of the company on 7 October 2015 as varied be further varied in accordance with a deed of variation tabled at the meeting, be set aside under s 75-41(3) of Schedule 2 to the Corporations Act 2001 (Cth). 2. The deed of company arrangement be terminated under s 445D(1) of the Act. 3. Jeremy Nipps and Cliff Rocke be appointed as joint and several liquidators of the company. 4. The plaintiff's costs in bringing this application be taxed and paid out of the assets of the company. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT COLVIN J: 1 The Deputy Commissioner of Taxation is a creditor of ST ACN116292463 Pty Limited (company). Since October 2015, the company has been subject to a deed of company arrangement. The deed administrators are Mr John Sheahan and Mr Ian Lock. The business of the company had been sold in March 2015 to a related entity STHZ Pty Limited (STHZ) for $1.68 million. 2 The deed provides for a different related entity of the company, Starform Holdings Pty Ltd (Starform) to contribute an amount by modest instalments with a large final payment for the purposes of the deed. The final payment was originally to be $1.5 million to be paid before October 2017. It was then contemplated that the deed would produce a recovery of over 56 cents in the dollar. Under the terms of the deed, related party creditors would receive nothing. 3 At the time the deed was approved, the report to creditors informed them, amongst other things, that there was a possible claim against STHZ associated with the sale of the company's business, which appeared to be at an under value. The Commissioner voted against the deed. 4 The deed has since been amended on two occasions. By the second amendment, proposed in June 2018, the deed was to be varied to reduce the final payment to $800,000. This proposal followed a failure by Starform to pay the instalments under the deed. Indeed, on the evidence before me, that failure continued well after June 2015 and there is nothing to suggest that it has been remedied as at today. 5 The circular to creditors by the administrators concerning the proposed second amendment was to the following effect: (1) each participating creditor would recover the same proportion of the deed fund as had previously been agreed if the proposed variation was adopted; (2) if the variation were accepted, there would be about $1 million for further distribution amongst participating creditors; (3) if the variation was accepted, the estimated return to non-related party creditors was that the Commissioner would receive around $750,000 (a recovery of around 31 cents in the dollar), Buildline Pty Ltd (in liq) (Buildline), would receive around $200,000 (a recovery of just over 16 cents in the dollar) and all other participating creditors would recover around 11 cents in the dollar; (4) if the variation was rejected, but the deed was to remain on foot, the administrator's expected total further recoveries would be about $800,000, reflecting the amount to be contributed by Starform; (5) in the view of the administrators there would be no business for the company to attempt to recover from STHZ through pursuit of a voidable transaction claimed, nor would there be any likelihood of a claim for damages against STHZ resulting in a return to the company because the liquidators of STHZ had advised that the business had been transferred from STHZ to another entity and no dividend was expected for the unsecured creditors of STHZ; (6) the only foreseeable avenue for achieving a return to creditors was recovery of receivables of the company, there being some $10.7 million in receivables owing; (7) the administrators expected that certain of the receivables may be recoverable, including an amount of some $1.3 million from an entity associated with the company, which that associated entity would appear to be able to pay; (8) the administrators recommended that creditors would be best served by the variation being rejected, the deed terminated and the company being wound up. 6 Despite the recommendations of the administrators, the proposal to vary the deed was carried. The Commissioner voted against the proposal, Buildline abstained and there were nine votes in favour, all being related party creditors. 7 In the above circumstances, the Commissioner commenced an application for orders to set aside the second variation of the deed, to terminate the deed, to wind up the company in insolvency, to remove Mr Sheahan and Mr Lock as administrators and to appoint Mr Jeremy Nipps and Mr Cliff Rocke, as joint and several liquidators of the company. The defendants to the application are the administrators and the parties to the deed. Service has been proved. There is no party who seeks to oppose the application, although for some time Starform had indicated opposition, that is no longer the case. 8 For the following reasons I am satisfied that orders should be made setting aside a second variation and terminating the deed under s 445D(1) of the Corporations Act 2001 (Cth). The consequence is that by operation of s 499(2D), Mr Sheahan and Mr Lock will no longer be the administrators of the company and there is, for that reason, no necessity to order their removal. Also, there will be a deemed resolution winding up the company. The effect of that deemed resolution as to the relevant relation back day is that the administration will have been taken to have ended when the deed was executed: s 91, item 10. 9 As a consequence, in my view there is no need for an order to be made winding up the company nor for the making of the proposed ancillary orders sought on the application. Second variation set aside 10 The second variation to the deed should be set aside because: (1) it was only supported by related party creditors; (2) if it had not been supported by those related party creditors, the variation would not have been passed; (3) the related party creditors, who were the only parties to support the variation would receive no recovery under its terms and they had no interest in the deed being performed, yet it may be inferred they had an interest in the affairs of the company not being investigated; (4) having regard to the matters stated in the circular to the creditors by the administrators the variation of the deed was plainly contrary to the interests of the creditors; (5) by reason of the breach of the deed and the evident inability of Starform to make the payments provided for in the deed, the practical choice for creditors was between the variation of a deed which was not being performed on the one hand and liquidation on the other; (6) by reason of the delay and past default in meeting the terms of the deed and the prospect of a much greater recovery in a liquidation as indicated by the circular from the administrators, liquidation was the option that was clearly in the best interests of creditors as a whole; and (7) although there was a prospect that the return for participating creditors who had not voted on the second variation might be less because related party creditors would participate in a distribution on the liquidation, other creditors had not sought to attend the meeting or participate in the present application and whether there would be a distribution to related party creditors depended upon whether their claims were upheld in the liquidation. 11 It is plain that the interests of all creditors as a group are better served by recovering as much as possible of the claims against the company and for that course to be followed in a liquidation. Deed terminated 12 The deed should be terminated and the company wound up for the same reasons. Section 445D provides that the Court may terminate a deed of company arrangement if satisfied, amongst other matters, that there has been a material contravention of the deed or the deed cannot be given effect without delay or effect cannot be given to the deed without injustice. For the reasons I have given I am satisfied as to those matters. Winding up and appointment of liquidator 13 The effect of termination of the deed would be to deem the company to have passed a resolution that it be wound up as I have indicated. As to the liquidators to be appointed, Mr Nipps and Mr Rocke have been acting as liquidators of STHZ. I am satisfied that it is appropriate that they be appointed as liquidators of the company because: (1) by reason of the administration of the affairs of STHZ it is to be expected that they will have some familiarity with the affairs of the company and its related entities; (2) the evidence indicates that there may be claims against related entities; (3) there is no conflict with the personal interests of Mr Nipps and Mr Rocke that would count against them being appointed; (4) although on the evidence the affairs of the company to be investigated will include the possibility of a claim against STHZ for sale of the company's business to STHZ at an under value, that does not concern the possibility of a claim to the business itself because on the evidence that business has been on-sold; (5) the claim in respect of the sale of the company's business at an under value is a claim of a kind also to be investigated in administering the affairs of STHZ because the business was on-sold in circumstances where such a claim is to be considered; (6) any issue about distribution arising from such claims can be the subject of appropriate Court orders if required. 14 For those reasons, the orders that I make on the application are these: (1) the resolution of the creditors of the company passed at the meeting of creditors of the company held on 19 July 2018 to the effect that the deed of company arrangement executed in respect of the company on 7 October 2015 as varied, be further varied in accordance with the deed of variation tabled at the meeting be set aside under s 75-41(3) of Schedule 2 to the Corporations Act; (2) the deed of company arrangement be terminated under s 445D(1) of the Corporations Act; (3) Mr Jeremy Nipps and Mr Cliff Rocke be appointed as joint and several liquidators of the company; and (4) the plaintiff's costs in bringing this application be taxed and paid out of the assets of the company. 15 Those will be the orders of the Court and they will be made available to the parties as soon as possible. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Colvin. Associate: Dated: 23 January 2019 SCHEDULE OF PARTIES WAD 379 of 2018 Defendants Fourth Defendant: JAMIE KEVIN POLLOCK Fifth Defendant: STARFORM HOLDINGS PTY LTD (ACN 162 064 208) Sixth Defendant: STHZ PTY LIMITED (IN LIQ) (FORMERLY STONETRADER HOLDINGS PTY LTD) (ACN 165 113 093) Seventh Defendant: SHIMMER HOLDINGS PTY LIMITED (ACN 167 887 345)