Boss Construction Equipment Australia P/L, Re [2000] QSC 21

SUPREME COURT OF QUEENSLAND CITATION: Re: Boss Construction Equipment Australia Pty Ltd [2000] QSC 021 PARTIES: BOSS CONSTRUCTION EQUIPMENT AUSTRALIA PTY LTD ACN 006 592 354 (In Liquidation) FILE NO/S: No. 1189 of 2000 DIVISION: Trial Division DELIVERED ON: 1 March 2000 DELIVERED AT: Brisbane HEARING DATE: 17 February 2000 JUDGE: Chesterman J. ORDER: 1. That the application be adjourned to a date to be fixed. 2. That the applicant pay the costs of the respondents to be assessed on the standard basis CATCHWORDS: CORPORATIONS – WINDING UP – WINDING UP BY A COURT – STAY OF PROCEEDINGS UNDER ORDER AND DISCHARGE OF ORDER – application for stay or termination of winding up – factors relevant to court’s discretion – rights of shareholder and liquidator protected – prejudice to contingent creditor. Aetna Properties Pty Ltd v GA Listing & Maintenance Pty Ltd [1994] 12 ACLC 404 Re Calgarry & Edmonton Land Co Ltd [1975] 1 WLR 355 Re Hester [1899] 22 QBD 632 Re Mascot Home Furnishers Pty Ltd [1970] VR 593 Companies Act (UK) s 256 Corporations Law s 482 COUNSEL: Mr S Couper QC for the applicant Mr D Savage for the respondent Mr C Coulson for the supporting creditor SOLICITORS: Nicol Robinson Halletts for the applicant Bowdens Lawyers for the respondent -- 1 of 6 -- 2 [1] On 24 February 1999 the court ordered that Boss Construction Equipment Australia Pty Ltd (“the company”) be wound up and appointed Messrs Stevenson & Jefferson to be the liquidators. On 2 February 2000 the sole shareholder and director of the company applied for an order, pursuant to s 482 of the Corporations Law, that the liquidation be terminated or, in the alternative, stayed. The section provides that: “(1) at any time during the winding up of a company, the court may, on the application of the liquidator or of a creditor or contributory, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.” [2] The section clearly confers a discretion on the court and it does so in very general terms. No criteria are identified by the statute to guide the exercise of the discretion. It would seem to follow from general principle that an applicant for an order terminating or staying a liquidation should demonstrate some good reason why the liquidation should not continue in the ordinary course. What is a good reason will depend upon the particular circumstances of each case. I hold this opinion with added confidence because it appears to be shared by Megarry J in Re Calgarry & Edmonton Land Co Ltd [1975] 1 WLR 355 at 358 where it was said, with reference to s 256 of the (English) Companies Act which is similar to s 482 of the Corporations Law: “… this language seems to me to make it abundantly clear that the jurisdiction is discretionary, and that it lies on those who seek a stay to make out a sufficient case for it.” [3] Similarly, Young J in Aetna Properties Pty Ltd v GA Listing & Maintenance Pty Ltd [1994] 12 ACLC 404 at 406 said “The question then is whether the court should grant a stay. There has been debate in the cases … I think that … one does not have to find special or exceptional circumstances but does have to find some valid reason why it is appropriate to stay rather than let the law take its normal course.” [4] In this context I regard “good”, “sufficient” and “valid” as synonyms. [5] In Calgarry Megarry J pointed out (at 360) that in exercising the discretion the court should consider what effect the order will have on the members, the shareholders and the liquidator. It is said in a number of cases that the wishes of the creditors are a relevant and, indeed, an important factor in the exercise of the discretion but do not determine the outcome. The origin of that observation is apparently some remarks of Fry LJ found in Re Hester [1889] 22 QBD 632 at 641: “It is an idle notion that the Court is bound by the consents of the creditors… The court has far larger and more important duties to perform than merely to consider whether the creditors have consented to the rescinding of the order.” -- 2 of 6 -- 3 [6] It has also been said in a number of cases, of which Re Mascot Home Furnishers Pty Ltd [1970] VR 593 is an example, that the court should have regard to “commercial morality” and the interests of the public. The points of particular concern are that insolvent companies ought not to be allowed to continue in business to the likely detriment of those who deal with them, and that a liquidator’s investigative powers into corporate wrongdoing should not be curtailed. [7] The company, at least until the middle of 1998, carried on the business of importing second hand excavation and earthmoving equipment which it then refurbished and sold. From mid 1998 some or all of the company’s business was transferred to another company, Boss Alljap Machinery Sales Pty Ltd (“Alljap”) of which the applicant was also the only shareholder and director. [8] The debt, non payment of which led to the company being wound up, was incurred in trade and was relatively modest in amount. The applicant deposes that it was not paid because of an oversight due to pressure of business. He also asserts that the company was at all times solvent. It is not necessary to form an opinion on the point which would, on the evidence, be difficult. The liquidator’s material points to a considerable degree of confusion and inconsistency in the financial records and accounts of the company which has made it difficult to arrive at an assessment of its financial position. Mr. Stevenson deposes to having met resistance from the applicant in his attempts to collect information and piece together a true picture of the company’s affairs. [9] This much appears established. The Australian Tax Office (“ATO”) was owed a considerable amount by way of sales tax. With one possible exception the company’s other debts were small in number and amount. The possibility is an amount of income tax owed to the ATO. [10] The applicant proposes that, as a condition of obtaining a termination or stay of the liquidation, that he pay into an account nominated by the liquidator an amount sufficient to pay the balance of all of the company’s debts which have been admitted to proof and the balance of the costs and expenses of the winding up. With the possible exception I have mentioned, the proposal means that the interests of the three classes of persons identified by Megarry J will have been fully protected. The creditors will be paid the full amount of their debts. The liquidator’s fees and expenses will be paid. The only shareholder is the applicant. The ATO has not, however, lodged a proof of debt in respect of income tax, so that under the terms of the proposal, any debt in respect of income tax will not be paid. [11] The applicant justifies his application on the basis that if he resumes control of the company it stands a good chance of recovering an asset which the liquidator will not pursue, and the ongoing expenses of the liquidation will cease. The asset is identified as exemptions from sales tax to which the company was entitled. The amount claimed by the ATO for sales tax has been paid in full. It is said that upon proof of the circumstances giving rise to the exemptions, large amounts of money will be payable by the ATO to the company. The applicant believes there are worthwhile prospects of the recovery. The liquidator is less sanguine and apparently shows no interest in pursuing the matter with the ATO or, perhaps, does not have access to the information necessary to persuade the ATO to make the repayments. -- 3 of 6 -- 4 [12] The second point concerns particularly the costs of litigation which the liquidator has commenced on behalf of the company against Alljap. The claim is for an amount in excess of $300,000.00 as damages for conversion. In essence the claim is that the company spent that amount in acquiring earth moving equipment which passed to the possession of Alljap. The liquidator seeks to recover the purchase price of the equipment which is enjoyed by Alljap. That company is defending the action. Legal costs are being incurred by the liquidator and by Alljap. If the applicant resumes control of the company he will end the litigation. He is the sole shareholder of both companies. No legitimate criticism could be made of the compromise in circumstances where Alljap is solvent and the company’s creditors have been paid in full. [13] The liquidator does not oppose the application but raises as matters relevant to the court’s discretion the following circumstances: (a) If the liquidation comes to an end the applicant does not intend the company to carry on business. (b) The applicant’s control of the company and its business was deficient. (c) The applicant has not provided the liquidator with any comprehensible account of the company’s financial affairs. (d) The creditors do not support the application. (e) The company is insolvent. [14] The attitude of the only trade creditor is that the liquidation should not be stayed or terminated unless the creditors receive full payment, or if, as a result of the stay or termination, control of the company reverts to the applicant. This objection is sought to be overcome by the applicant undertaking that in the event an order is made bringing the liquidation to an end he will not: (a) Sell any shares in the company. (b) Resign as a director or cause any other person to be appointed as a director. (c) Permit the company to carry on business and will limit its activities to the recovery of the sales tax exemptions and negotiating with the ATO in respect of income tax. (d) Allow the company to continue in existence for more than 12 months. [15] These undertakings appear to meet the objections of the liquidator and of the trade creditor. The undoubted public interest which exists to prevent an insolvent company from continuing to trade is met by the undertaking, as is the concern that the company will continue under the control of someone unfit for that role. I am not sure this last consideration should be much countenanced. The liquidator raises it but the evidence that the applicant was incompetent is not compelling and the Corporations Law contains few limitations on the proprietor of a failed company starting anew. The court should not be too astute to find a public interest where parliament has not done so. [16] No doubt the fact that a company in liquidation was not intended to trade if liquidation was terminated would ordinarily tell against making an order pursuant to s 482. In this case the applicant’s declared reasons are sufficient to take the case -- 4 of 6 -- 5 out of the ordinary. Were it not for the position of the ATO I would make the order sought. [17] The ATO opposes the application on the basis that it is owed “a significant but unquantified” amount in respect of income tax. Because the amount is unquantified the ATO has not submitted its proof of debt and will not be protected by the applicant’s proposal. [18] The applicant counters by submitting that the material shows that no tax is owed. Reliance is placed upon an affidavit filed by the ATO which asserts an income tax liability predicated only upon a successful outcome to the liquidator’s litigation against Alljap. The argument continues that the predication is misconceived because victory will result in the company recovering the value of the property for which it has paid. There is in this equation no element of profit which is assessable to income tax. The company has paid out money and will recover the exact equivalent of what it paid for. [19] If that were the only relevant material I would accept the applicant’s submissions, but there is more. The company did not lodge an income tax return for the year ended June 1998. The liquidator has been unable, through lack of information, to lodge a return for the year ended June 1999. The applicant asserts that in the relevant periods the company earned no taxable income but no particulars are supplied to support the contention. Of more concern is the liquidator’s evidence that he has had extreme difficulty in obtaining information relevant to the company’s financial affairs from the applicant. [20] If the application fails the liquidators will remain in control of the company and should, eventually, be in a position to lodge income tax returns. The ATO, through its counsel, indicated that it would prove for the amount of tax returned by the liquidators. The assets of the company will be distributed rateably amongst creditors. Those assets will include the proceeds of litigation should the liquidators be successful. If the application is allowed the company will have no assets. The ATO will be able to use its considerable powers of investigation to form its own assessment of what, if any, tax it is owed and wind the company up a second time if its demand for the amount go unheeded. There are two disadvantages in this course. The first is that there is the real potential for the ATO to receive less than the other creditors. They will be paid in full and the ATO will probably receive nothing. Such discrimination is inimical to the principles which underly company liquidations. The second is that the ATO will be put to unnecessary expense and inconvenience. [21] Because of the real prospect that the ATO will prove to be a creditor who will be disadvantaged by the applicant’s proposal I will not make the order sought. The applicant has not proved that the order will be fair to all creditors. I will not, however, dismiss the application but adjourn it to allow the applicant to come to terms with the ATO whether by demonstrating the company’s true position or otherwise. It should not be a matter of great difficulty for the applicant to demonstrate by reference to the company’s records the truth of his assertion that it did not earn any taxable income for the years in question. If the ATO’s interests as a contingent creditor are met I indicate that I can see no objection to the success of the application. -- 5 of 6 -- 6 [22] I order that the application be adjourned to a date to be fixed. The applicant must pay the costs of the respondents to be assessed on the standard basis. -- 6 of 6 --