Yesterday the Federal Court made unprecedented use of an obscure provision of the Corporations Act to give a distressed company a final chance to sort itself out.

Instead of winding the company up immediately, the court made a conditional winding up order, which now remains suspended over the company like a guillotine, “encouraging” it to pay its outstanding tax and lodge its outstanding BAS by particular dates – failing which a liquidator will be appointed automatically.

 

DCT v TD Preece Pty Limited

The matter of DCT v TD Preece Pty Limited [2013] FCA 1365 started off as a stock-standard ATO winding up application.

The company was the manufacturer of specialist breathing equipment for a variety of customers, including state fire authorities and Special Forces soldiers. In recent times the company had run into cash flow trouble, as a result of which it had accumulated $156K in tax debt. The ATO had given the company a chance to pay the debt off by instalments, but the company had breached the payment arrangement.

The ATO eventually ran out of patience and commenced winding up proceedings. The proceedings were adjourned several times, but the debt remained unpaid. The company made a final last-ditch application for an adjournment last week, explaining that the reason why the company was in trouble was because the director had been unable to refinance his home loan due to pending family law proceedings. The company also informed the court that, if it were given the chance, it could lodge all of its outstanding BAS by 14 February 2014, and pay the tax debt in full by instalments – $45,000 up front and the rest at $6,500 per month.

The ATO objected to this and sought an immediate winding up order. It pointed out that the company was insolvent, and submitted that there is strong public interest in winding up insolvent companies. It complained there was no precedent for the Federal Court to impose a payment arrangement on the ATO – against its will – over a period of two years. It made several other compelling and well-reasoned submissions as to why the company should be wound up immediately.

 

The outcome

The court agreed with the ATO that the proceedings should not be adjourned, noting that four adjournments had already been granted and observing that the application “should be finalised now so that both parties have certainty”. Normally, that would the end of it: adjournment refused, winding up order made. However, the company refused to go down without a fight.

In a last ditch attempt to save the business, the company submitted that, rather than winding up the company immediately, the court should make a “guillotine order” – a winding up order which would be suspended so that, provided the company lodged its BAS and paid its tax by certain dates, it could avoid liquidation.

Such an order would be highly unusual. However, the legislative framework was there to enable it. Under section 467 of the Corporations Act, a court confronted with a winding application is empowered to make “any interim or other order that it thinks fit”.

In considering whether to use this power to make a guillotine order, the court observed that the circumstances of this case were unique, noting that:

• the company does appear to be paying all of its other creditors satisfactorily;
• the company had undertaken to lodge all of its outstanding BAS within eight weeks;
• the only reason why the ATO debt was not paid was because the director’s personal assets were effectively frozen;
• an immediate winding up order would interfere with the case management of the family law proceedings; and
• the winding up of the company would cause “significant disruption” to the supply of vital equipment for fire-fighters and Special Forces soldiers.

The court also alluded to a line of authority which recognised that, “in exceptional cases where a company has been found to be insolvent, it may be appropriate to give the company an opportunity to trade out of its problems”.

Having regard to those matters, the court determined to give the taxpayer the extra time it sought:

In my view, the preferable course is to make, in effect, a conditional winding up order. The company will not be wound up immediately (or possibly at all) as long as it complies with certain conditions regarding the payment of the taxation debt and also attends by no later than 14 February 2014 to providing the outstanding business and instalment activity statements. If the company does not comply with any of the conditions, the winding up order will be effective instanter. In my view, the Court has the power to make such an order under ss 459A and 467 of the Act.

 

What this all means

The court’s innovative use of the section 467 discretion in TD Preece should not be construed as an indication that the court will impose taxpayer-devised repayment arrangements on the ATO willy-nilly.

However, it does open the door for distressed companies to ask for a winding-up order to be suspended in order to give them a last chance to trade their way out of insolvency, provided they can satisfy the court that, in all of the circumstances of the case, such an order would be appropriate. This will be a value judgment that turns on the facts of each case.

 

Conclusion

Guillotine winding up orders have been made before, but not so as to impose a repayment arrangement on an indignant creditor. Furthermore, guillotine winding up orders are not without their problems.

If a winding up order is suspended, and triggered later on, the winding up will be deemed to have commenced on the date the order was made (section 513A(e)). This will have unexpected ramifications for the avoidance of unfair preferences and uncommercial transactions – essentially, no transaction entered into after the date of the order (but before it is triggered) will be voidable.

Even more interesting is the possible interaction with section 267 of the PPSA. Under that provision, unperfected security interests “vest” (i.e. disappear) as soon as a winding up order is “made”. The PPSA does not appear to cater for the suspension of a winding up order. It is at least arguable that the making of the order therefore releases the company from any unperfected security interests, even if the order never comes into effect.

These problems could (and possibly will) be addressed by the careful crafting of orders. The parties have been directed to seek to agree on the wording of final orders by Thursday. The solicitor for the plaintiff, Counsel for the defendant and the court will therefore soon decide the orders that should, in due course, save the company. This is of course not the first time three wise men have found themselves witnessing the arrival of a saviour around about this time of year!

On that festive note, Merry Christmas from all of us at ERA Legal. We look forward to working with you in the New Year 🙂