New South Wales Supreme Court CITATION : Deputy Commissioner of Taxation: In the matter of First Netcom Pty Limited [2000] NSWSC 989 revised - 30/10/2000 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3760/00 HEARING DATE(S) : 23 October 2000 JUDGMENT DATE : 23 October 2000 Deputy Commissioner of Taxation (Plaintiff) PARTIES : First Netcom Pty Limited (ACN 067 043 145) (First Defendant) Telstra Corporation Limited (Second Defendant) JUDGMENT OF : Santow J M R Aldridge (Plaintiff) B A Coles, QC/C R C Newlinds (First Defendant) COUNSEL : L G Foster, SC/L McCallum (Second Defendant) J Teasdale (Solicitor) (CMF Property Services Ltd) Mention for D McCrostie (QBE Workers Compensation (NSW) Limited) Australian Government Solciitor (Plaintiff) John Walsh & Partners (First Defendant) SOLICITORS : Mallesons Stephen Jaques (Second Defendant) Gadens Lawyers (CMF Property Services Limited) P W Turk & Associates (QBE Workers Compensation (NSW) Limited) CATCHWORDS : CORPORATIONS — Adjournment of winding up application in favour of administration leading to deed of company arrangement — Circumstances where interests of creditors require short adjournment so administrator can carry out further investigations material to deed of company arrangement and its relative worth to creditors compared to liquidation — relevant factors. LEGISLATION CITED : Corporations Law s436A; s439A; s440A; s459E; s459P CASES CITED : Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194 Yates v Deputy Commissioner of Taxation (1998) 26 ACSR 629 DECISION : Adjournment granted to 1 November 2000 REVISED — 30 October, 2000 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 3760/00 In the matter of FIRST NETCOM PTY LIMITED (ACN 067 043 145) Deputy Commissioner of Taxation Plaintiff First Netcom Pty Limited First Defendant Telstra Corporation Limited Second Defendant Judgment — ex tempore 23 October 2000 INTRODUCTION 1 This is an application for adjournment of a winding up application, pursuant to s440A(2) of the Corporations Law, where the onus of showing that it is in the interests of creditors rests on the Administrator. The salient facts are agreed and set out below: (1) On 5 June 2000 the Deputy Commissioner of Taxation served on First Netcom a demand pursuant to s459E of the Corporations Law in relation to a debt quantified at $626,464.54. (2) That demand was not complied with. (3) On 25 August 2000 the Deputy Commissioner commenced proceedings pursuant to s459P of the Corporations Law to wind up First Netcom. (4) Those proceedings were returnable before the Court on 19 October 2000. (5) On 12 October 2000 the directors of First Netcom resolved, pursuant to s436A of the Corporations Law that Andrew Wily be appointed administrator of First Netcom. (6) There is no issue as to the validity of the appointment of the administrator. (7) The first meeting of creditors (s436E) was held on 18 October 2000. (8) It is proposed that the second meeting of creditors (s439A) be held on 8 November 2000. 2 The present application under s440A(2) of the Corporations Law brought by the Administrator against opposition by the Deputy Commissioner of Taxation essentially involves a choice at a point where a company's affairs make difficult any reliable conclusion. The choice is between the prospect of a Deed of Company Arrangement yet to be promulgated but very broadly outlined and immediate winding-up of the First Defendant. The First Defendant is a company which for the last three years has had no business but simply some twelve employees. It is said of them that they will, under the proposed Deed of Company Arrangement, be more successful than a liquidator in pursuing the receivables owed to the First Defendant, estimated for recovery purposes at $2,800,000. Further, that their services would be unlikely to be available to the liquidator on the same incentive basis. 3 The other benefit said to result from the Deed of Company Arrangement is that related creditors to the First Defendant totalling approximately $2.6 million and associated with a Mr Macdonald, the Managing Director and Principal of the First Defendant, will agree not to prove under the Deed of Company Administration in competition with all other creditors. Both Telstra and the Deputy Commissioner of taxation say the position of the First Defendant is hopelessly insolvent, that any benefits from a Deed of Company Arrangement are intrinsically speculative, and adjournment of the winding up application has not been shown to be in the interests of creditors. 4 The Administrator has been in office effectively for six working days, the seventh being in this Court. Necessarily his familiarity with critical matters for the feasibility of the Deed of Company Arrangement is limited. He is not however in the situation where the company has an ongoing business to sell, where the issue is whether a Deed of Company Arrangement would assist in permitting a beneficial sale and consequently greater recovery for creditors. 5 The critical matters upon which the Administrator clearly lacks familiarity in any sufficiently reliable sense, are at least these. (a) An aged debtors' ledger and history of past recoveries, (b) The basis for claimed related creditor indebtedness of $2.6 million and whether upon closer examination that related creditor indebtedness is properly substantiatable having regard also no doubt to potential preferences, and (c) The amount one substantial creditor, Telstra Corporation Limited, which has been joined as a Second Defendant, will be permitted to prove for, when that claim has been substantiated, and noting that it is at present the subject of contested Federal Court proceedings. 6 As against declining the Administrator's application which the Deputy Commissioner of Taxation and Telstra urge on the basis that what is proposed in the Deed of Company Arrangement is unachievable, is the attractive prospect by the Deed of Company Arrangement of an estimated return to unsecured creditors of 100 cents in the dollar as against 11 cents in the dollar in liquidation; see Annexure A to Mr Wily's affidavit of 20 October 2000. That is achieved only if the recoverability of receivables is at what may be an optimistic recovery of 95% compared to the Statement of Assets and Liabilities as at 16 October 2000 (PX2), though much less optimistic if compared to the First Defendant's apparent financial position as at 30 June 2000. There the then figure for receivables was a net $4.628 million; see D2X7. 7 There are other conditions needed to be fulfilled, if the hoped for benefits of the Deed of Company Arrangement are not to prove illusory. Firstly that the so-called related creditors turn out on a more stringent evaluation than has yet taken place, to be of the order of $2.6 million such that their standing back from the proof of the Deed of Company Arrangement is not a spurious benefit. Secondly, that other creditors of the First Defendant have not been grossly underestimated. RESOLUTION OF APPLICATION 8 The authorities on s440A(2) require, in my view, more than a mere speculative possibility of a higher return to creditors if a winding-up application is to be adjourned, here in favour of the prospect of the Deed of Company Arrangement. I say "prospect" because the Administrator may yet determine on closer examination that the case for it is not sufficiently strong when the matters that I have earlier identified are probed more stringently with the additional time I contemplate his now having to do so. 9 In my view there must be a real prospect of benefit from the adjournment. But it is too simplistic to say that that prospect must necessarily be, at this point, a comfortable satisfaction that a Deed of Company Arrangement will yield a greater amount than winding-up. Of course in some cases that may already be safely apparent whilst in others the company is so evidently a basket case that further delay of the inevitable would simply add to costs; see, for examples, Yates v Deputy Commissioner of Taxation (1998) 26 ACSR 629. 10 However, there is an intermediate case of which Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194 is an example. This is where it is in the interests of the company's creditors for there to be a sufficient time by way of brief adjournment of the winding-up application for the possible prospect of greater benefit to creditors to be investigated, usually involving a Deed of Company Arrangement. The result may be either that this prospect proves fruitless or that this prospect becomes sufficiently probable that the matter should be left finally to creditors to decide usually by voting on a Deed of Company Arrangement. I am satisfied that this is such a case both because of the very great potential comparative benefits if the Administrator's recommendation turns out to be well-founded when he has opportunity to investigate further its necessary underpinning and because the adjournment needed to do this is relatively modest. 11 Against that course is the prospect of yet further costs and it has led me to hesitate before inflicting that upon the parties. But in the end I am influenced by the fact that these costs are not likely to be excessive, and by the good sense of letting the Administrator check urgently each of the matters which I have noted earlier require substantiation. This entails a short adjournment to the point of time when it is estimated that the Administrator will have prepared his report to the second meeting of creditors containing that substantiation and a properly drafted Deed of Company Arrangement. It may be that the Administrator will decide to abandon the Deed of Company Arrangement with no criticism of the Administrator being justified for that, either because the voting result will see it inevitably fail or because substantiation leads the Administrator to feel that he can no longer recommend that course. Or the Administrator may recommend proceeding and putting the matter to creditors to decide. 12 Accordingly, I make the following orders: 1. I adjourn the winding-up application of the Plaintiff to the expiry of 1 November 2000; 2. I direct that a draft of the Notice to Creditors with attached report and a sufficient description of the material terms of the proposed Deed of Company Arrangement covering the matters earlier identified in this judgment as requiring further substantiation be furnished to all parties by 31 October 2000 at 2 pm and earlier if available, noting that the First Defendant will take all reasonable steps compatibly with doing what is required to expedite these materials. 3. Leave to apply on short notice. 4. Leave to serve any subpoenas by 25 October at 12 noon with a return date of 2 pm 31 October before me. ********** Last Modified: 11/01/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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