Deputy Commissioner of Taxation v Choice Design Homes Pty Ltd [1999] NSWSC 589

New South Wales Supreme Court CITATION : Deputy Commissioner of Taxation v Choice Design Homes Pty Ltd [1999] NSWSC 589 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 4363/98 HEARING DATE(S) : 03/06/99 JUDGMENT DATE : 3 June 1999

PARTIES : Deputy Commissioner of Taxation (P) Choice Design Homes Pty Ltd (D) JUDGMENT OF : Young J

COUNSEL : Plaintiff: M R Aldridge Defendant: R Harper SOLICITORS : Plaintiff: Australian Government Solicitor Defendant: Turnbull Hill CATCHWORDS : Corporations [187]; Administration; Whether summons for winding up should be adjourned ACTS CITED : Corporations Law ss 435A, 440A(2) Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456; 32 ATR 632 Re Data Homes Pty Ltd [1972] 2 NSWLR 22 CASES CITED : Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1998) 16 ACLC 448 Re Intag International Ltd & The Corporations Law [1999] NSWSC 571 Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative [1999] NSWSC 507 DECISION : See para 26

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

YOUNG, J

THURSDAY 3 JUNE 1999

4363/98 - DEPUTY COMMISSIONER OF TAXATION V CHOICE DESIGN HOMES PTY LTD

JUDGMENT 1 HIS HONOUR : The plaintiff, as the second substituted petitioning creditor, seeks to wind up the defendant in insolvency. The initial summons was filed on 22 October 1998 by a creditor that appears since to have been paid. Accordingly, if an order for winding up is made in this matter the effective date for assessing preferences et cetera will be 22 October 1998. 2 On 12 May 1999, the defendant company went into voluntary administration and Mr R G Tolcher, a registered liquidator, became the administrator. 3 The company, through its administrator, seeks an adjournment for fourteen days of the hearing of this petition so that it can hold a meeting of creditors for the purpose of considering whether the company should enter into a deed of arrangement. It must follow that the alternative must also be a possibility, that is, the creditors will reject the deed of arrangement and will force the company into a voluntary winding up with Mr Tolcher as liquidator, the effective date for relation back purposes being 12 May 1999. 4 Last week I dealt with a similar application and, in view of the fact that it was only for a week, I granted it. Today far more material has been placed before me. Last week there was no question of anything serious happening during the adjournment; this week there is the distinct possibility that a resolution might be passed by creditors which may affect the plaintiff. 5 Although s 435A of the Corporations Law appears to set out a general policy that if a company can be salvaged then all reasonable attempts should be made for salvation, s 440A(2), which is directed to the situation where a company is under administration but there is a pending winding up summons, puts the onus on the company and its administrators to satisfy the court that it is in the interests of the company's creditors for the administration to continue. 6 As a rule of thumb, in these sort of matters, I have been applying a fourfold guideline. As I indicated in the converse situation to the present in Re Intag International Ltd & The Corporations Law [1999] NSWSC 571, the court should ask itself four questions in order, viz: (1) Is the company insolvent? (2) Is the company salvageable? (3) Is the proposed salvation in the interests of creditors? and (4) Is the proposed salvation in the public interest? 7 I indicated to counsel I would be applying those guidelines in this case, but questions arose as to whether that was legitimate. 8 Section 440A(2) focuses on the "interests of the company's creditors". What does that mean? Mr Aldridge, who appeared for the plaintiff, said that the interests of the creditors meant not only the creditors' financial interests in this particular winding up, but also the interests of all decent traders, including creditors. He put that good business principles should be observed, so that it was not in the interests of creditors that a company should go back into the marketplace and trade whilst insolvent or, indeed, that a director of rogue capacity, as the plaintiff would have me infer is the situation in this case, should continue to trade in the same cavalier fashion as he has heretofore. 9 It is difficult to see how the interests of creditors do extend that far. In Re Data Homes Pty Ltd [1972] 2 NSWLR 22, the Court of Appeal indicated that when considering schemes of arrangement the court need look at two matters; viz (a) the interests of creditors; and (b) the public interest. 10 The judgment of Mason JA tends to compartmentalize these two interests. It is hard then to see how the public interest actually comes into the phrase "the interests of creditors", and it is also noteworthy that s 440A(2) is expressed in mandatory language; that is the court is to adjourn the hearing if satisfied that the administration is in the interests of creditors and presumably no other interests are relevant. 11 However, it does seem to me that Mr Aldridge is correct up to the point that it cannot be in the interests of creditors that there be a scheme propounded which is unlikely to fulfil its promise, or that the company spend considerable sums in legal and accounting fees in defending the scheme against attacks by dissentients, which attacks may have a very good chance of succeeding because this further depletes the pool of assets that is to be available for the payment of the unsecured creditors. 12 Accordingly, my fourfold guideline I believe is a legitimate way of approaching the matter. There are guidelines and there will be cases where the facts will show some other method of approach will be preferable. 13 The other problem about s 440A(2) is the enquiry whether the administration generally is in the interests of creditors, or the administration for the period of the adjournment is in the interests of creditors. I think it is the second and Santow J seems to have proceeded in that direction in Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative [1999] NSWSC 507 at para 6, and indeed I probably subconsciously followed the second principle last week in the present case. 14 However, as something significant could happen in the next period of adjournment, the question really aligns into whether the company has satisfied the onus that the administration should continue. 15 As to this, in Fullview v WLW Pty Ltd Parkinson JR, 17 September 1997, unreported, the learned Judicial Registrar approached similar question by posing the test, "Is there even a mere possibility of a greater return to creditors under administration than under a winding up?" Part of the reason he said that was that the application was made at an early stage before the second meeting of creditors and before all the facts were available. 16 With respect to the learned Judicial Registrar, that has not been the way in which the matter has generally been approached. In Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456, 457; 32 ATR 632, 633, McPherson JA, giving the decision of the Queensland Court of Appeal, said that the question was whether there was some persuasive evidence to enable the court to see that the creditors could hope to get more from liquidation or administration. 17 That was taken up by Santow J in this Court in Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1998) 16 ACLC 448, 451 and the Waste Recycling case at para 6. 18 In the latter case his Honour said: "There must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors." 19 The way in which Santow J approached the matter in both those cases was to consider the pros and the cons. 20 The points in favour of continuing the administration are that the creditors are likely to get more money than otherwise. The proposal set out in Mr Tolcher's affidavit of 2 June 1999 is that related parties, by which I assume was meant the director and his relatives, would defer all their claims, that other creditors would in due course be paid fifty cents in the dollar, that the company would continue to trade and contribute $10,000 per month to pay former creditors, which contribution would be "underwritten and personally guaranteed" by the company's director. 21 The administrator considers that on a liquidation the optimistic return to creditors would be about eleven cents in the dollar and on the pessimistic view nil. 22 It is notable that in the light of additional facts that have been found, mainly by the efforts of the plaintiff, the optimistic forecast has been reduced down from twenty-six cents in the dollar to eleven cents in the dollar over the last week or so. 23 As against this the following matters should be considered: (a) there appear to be preferences in the period 22 April to 12 May of $58,000 and as prior records are "missing" there may well be more. These would be caught up if the company was put into liquidation; (b) there are some aspects of the behaviour of the director which might in the public interest be inquired into and may even produce some more moneys into the pool available to the creditors; (c) the figures which were supplied to the administrator by the director appear to be very questionable, both from material found from the plaintiff's auditors and from other creditors whom the plaintiff has contacted; (d) the date of commencement of the winding up generally may be very significant in this case; and (e) the proposal would seem to involve a company going back into the marketplace while it was insolvent and trading whilst it was insolvent because even if there was a complete release of all the outside claims, the related parties' claim would probably make it insolvent. This is both against the public interest, see the Data Homes case, and conduct that is prohibited by the statute. 24 Mr Aldridge sought to make a sixth point and that was that the conduct generally of the director has been such that he should not be permitted to continue to trade with this corporate vehicle. 25 Mr Harper for the administrator objected to this evidence and to my mind it was basically irrelevant. One cannot say that a person who has been guilty of improper behaviour as a director, assuming that the director in this case has been guilty of such conduct, is going to pursue that behaviour in the future. However, the point has some relevance because if this company is wound up it may be a ground for the regulatory authority to move to disqualify the director from further involvement with corporations, which might not follow from an administration. 26 It seems to me that the factors favouring winding up outweigh the factors for continuing under administration. Accordingly, the administrator has not made out his case and I will not adjourn the hearing of the winding up application. [His Honour then proceeded to hear the summons for winding up, ordered that the company be wound up and appointed a liquidator]