The Federal Court has ordered that a winding up order be set aside on the provisio that a taxpayer pay an amount of unpaid taxes to the DCT as well as liquidator fees. This was done by consent.

Background

On 13 September 2017, a Registrar of the Court ordered the SMAR Nominees Pty Ltd (SMAR) be wound up, in insolvency, and ordered that Christopher Powell be appointed as its liquidator. That order was made on the application of the Deputy Commissioner of Taxation (DCT) who relied on the failure of SMAR to comply with a statutory demand for a payment of $199,397.22.

On 26 October 2017, Mr Ruggiero, who is the sole director of SMAR, lodged an interlocutory process seeking orders staying and setting aside the winding up orders. The application indicated that Mr Ruggiero sought those orders pursuant to r39.05 of the Federal Court Rules 2011 (Cth) and s 482 of the Corporations Act 2001 (Cth).

  • Section 482 contemplates orders staying or terminating a winding up.
  • Counsel for Mr Ruggiero has indicated that he seeks a ‘setting aside’ of the winding up order rather than a ‘termination’ of the winding up and accordingly that he relies on r 39.05 only.

The circumstances in which the application is made are these. The DCT served the originating process seeking the winding up at SMAR’s registered office on 11 August 2017. The registered office is at the premises of SMAR’s accountants. The accountants did not bring the proceedings to Mr Ruggiero’s attention, and he was unaware of the application and the hearing on 13 September 2017. Hence the order for winding up of SMAR was made in the absence of any representative from SMAR.

Since his appointment, the liquidator: Mr Powell, has continued to trade the two franchise businesses, carried on by SMAR, and has done so profitably. He deposes that he has received cooperation from the sole director: Mr Ruggiero, in that respect.

Mr Ruggiero deposes that SMAR is able to pay the outstanding debt to the Australian Taxation Office (ATO) in full, together with the costs of the DCT. Mr Parr, a member of the firm of solicitors retained by Mr Ruggiero, has deposed that the sum of $222,555.75 has been paid into the firm’s trust account, for the purpose of payment of the ATO debt and of the costs incurred by the ATO.

The liquidator: Mr Powell, has deposed to be holding a total of $94,822.80. This means that, after payment of the expenses associated with the conduct of the business, he has net available cash of $56,659.66.

Setting the order aside under r39.05

Rule 39.05 provides:

The Court may vary or set aside a judgment or order after it has been entered if:

(a)  it was made in the absence of a party; or

(f)  the party in whose favour it was made consents;

 The Court noted the following about the requirements for satisfying this rule. [para 8]

An applicant seeking a setting aside order under r 39.05(a) must usually establish that there is a proper explanation for the order having been made in the party’s absence, and that there are matters of sufficient merit to warrant the setting aside of the order. The arrangements which the parties propose for payment of the outstanding debt of the ATO and of Mr Powell’s fees and expenses, together with the evidence concerning the solvency of SMAR, indicate that the latter considerations are established.

Evidence of solvency

There was evidence of solvency, in the liquidator’s report to creditors. The Courts said this. [para 7]

There is evidence from which it can be inferred that SMAR is solvent, and probably was solvent at the date the winding up order was made. Mr Powell’s report to creditors indicates that SMAR has a surplus of assets over liabilities of some $34,255, and that its assets included loans it had made to persons associated with it. Those loans seem to be recoverable.

Standing of the director to bring the action

It wasn’t obvious that a director of a company, then in liquidation, has standing to bring this ‘setting aside’ order. But the Court said the following. [para 9]

I proceed on the basis that Mr Ruggiero, as the sole director of SMAR, does have standing to apply for the setting aside. There was no suggestion by the DCT or by the Liquidator to the contrary. Accordingly, it is unnecessary to enter into the controversy as to whether a director of a company in litigation has standing, without obtaining the leave of the Court, to bring proceedings in the name of the company: see the judgment of Perram J in Binetter v Deputy Commissioner of Taxation [2011] FCA 184 at [11].

Authority on requirements to make the order

The Applicant director cited the following as the law on what is required to make the application. [para 10]

  1. As to the exercise of the discretion to set aside the order, counsel for Mr Ruggiero referred to the statement of Hodgson J in George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 15 ACLR 464 at 465:

In my view, if an order winding up a company is made in the absence of the defendant company, and an application is brought promptly by the company, with notice being given to the liquidator, to the plaintiff and to any creditor who appear at the hearing; and if the evidence shows an explanation for the nonappearance at the hearing and indicates solvency of the company; and there is consent to setting aside, or at least nonopposition; and if the liquidator indicates that nothing in his investigations to date shows a reason for the company to be stopped from trading, then the Court will normally set aside the order.

Is the liquidator’s consent required?

Despite the above passage suggesting that the liquidator’s consent is required, the Court noted the following. [para 11]

Although Hodgson J in this passage suggested that the consent of the liquidator is required, that is not necessarily so: see Deputy Commissioner of Taxation v Annesley Plant Hire [2010] FCA 755 at [13].

Does solvency have to be positively proved and

On the question of whether an application to set aside the order (under r39.05), is easier than terminating it (under s482), because solvency doesn’t have to be positively established, the Court said the following. [para 12]

I also note that it has been said that an application to set aside an order under r 39.05 or its analogues has a lower onus than an application under s 482, in that the applicant need not demonstrate positive proof of the company’s solvency. Instead, satisfaction that there is an “arguable case of insolvency” or “some evidence of insolvency” may be sufficient: see Workers Compensation Nominal Insurer v Detailed Flooring Pty Ltd [2010] NSWSC 1056, (2010) 80 ACSR 1 at [35]; Double Bay Newspapers v The Fitness Lounge [2006] NSWSC 226, (2006) 57 ACSR 131 at [24]; and Deputy Commissioner of Taxation v Annesley Plant Hire at [12].

(DCT, in the matter of SMAR Nominees Pty Ltd (in liq) v SMAR Nominees Pty Ltd (in liq) [2017] FCA 1384, Federal Court, White J, 20 November 2017).

[FJM; LTN 229, 29/11/17; Tax Month Nov 2017]

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