Re Roma Industries Pty. Limited.

Judges:
Bowen CJ

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 29 March 1976.

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Bowen C.J. in Eq.: The Deputy Commissioner of Taxation by his petition presented on 25th November, 1975 seeks an order for the winding up of Roma Industries Pty. Limited. The Commissioner claims the company is indebted in the sum of $40,407.41. It is agreed that this has since been reduced by payments of approximately $4,000. The sum claimed comprises income tax, Div. 7 tax, and additional tax and penalty in respect of late payment.

The Commissioner has proved that the amount is due and payable and that a demand under sec. 222 of the Companies Act, 1961, has been duly served upon the company, and has not been complied with. He is prima facie entitled to a winding up order

The company has proved that in respect of each relevant assessment an objection has been lodged and has been disallowed, and that a request has been made to refer the decision to disallow the objection to a Board of Review for review. These appeals have not yet come on for hearing, and it seems likely that some substantial time will elapse before they do. Reference is made to sec. 201 of the Income Tax Assessment Act, 1936, as amended, which is as follows:

``201. The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending.''

Notwithstanding the assessments are under appeal, the amounts in question are due and payable, and could be successfully sued for by the Commissioner in a court of competent jurisdiction; the existence of the appeal would not be a defence (
F.C. of T. v. Niblett (1965) 83 W.N. (Pt. 1) 405. In the event of the Commissioner suing and recovering judgment, however, the company (so counsel for the company argues) would have the right to apply to the Court for time to pay, which, of course, might not be granted. He says that by proceeding by way of petition to wind up the company the Commissioner is depriving the company of that right. He further argues that a creditor who is unpaid is not entitled to a winding up order as of right unless he shows he has exhausted his other possible remedies.

Counsel for the company further submits that the company is solvent, in the sense that by borrowing or realising assets it could place itself in a position to pay its debts or at least, its debts other than that claimed by the Commissioner, and that the only other creditor for any significant amount opposes the making of a winding up order.

The other creditor referred to is Mrs. M.E.Rutherford, a shareholder and director of the company, who at the time of the presentation of the petition was owed $79,792. According to the statement filed by the Commissioner under rl. 28(1) of the Companies Rules, 1968, following the advertisement of the hearing of the petition five creditors gave notice of their intention to appear at the hearing and indicated they would up. They claimed to be owed debts amounting in total to $51,000. It appears that since then Mrs. Rutherford has paid out these creditors. It was agreed that at the time of the hearing she was owed $130,792. Apart from the petitioning creditor no creditor appeared at the hearing to support the petition. Debts due to sundry creditors would be relatively small in amount, totalling less than $10,000.

It appears that a mortgage under the Real Property Act, 1900, over the company's two freehold properties, held by the company's bank to secure and indebtedness of $51,000 had, by the time of the hearing, been transferred to Mrs. Rutherford.

Counsel for the company submits there has been delay on the part of the Commissioner in dealing with the company's objections to its tax assessments, and that in fact the objections were outstanding and a awaiting decision by the Commissioner when he presented his petition. The company is willing to join in seeking an

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ATC 4115

expedited hearing before the Board of Review. Counsel for the company points out that, if an order for winding up is made, the liquidator will be acting for the Commissioner as a preferred creditor as well as for the other creditors and contributories, so that the Commissioner might then be regarded as being on both sides of the record in relation to the taxation appeals. He argues that the petition should be dismissed. He further states the company is prepared to grant a second mortgage over its two freehold properties to secure payment of the Commissioner's claim. The two freehold properties of the company appear in its balance-sheet as at 30th June, 1975 at a figure of $102,500, and, as has been mentioned, are already subject to a mortgage for $51,000. On these figures the equity would more than cover the Commissioner's claim of $40,407.41. However, in the balance-sheet as at 30th June, 1974 these properties appeared at a figure of $49,433, noted as being ``At Cost''. The higher figure appearing in the balance-sheet as at 30th June, 1975 is described in that document as ``Directors' Valuation, 1975'', and in a note to the accounts is said to be based on an independent valuation by Stanley Thompson Real Estate Pty. Limited.

Counsel for the Commissioner submits that this is not a ``dispute'' case, falling within the recognised class in respect of which the practice of the Court is to dismiss the petition to wind up. He argues that the fact that an appeal is pending is not in itself a ground for a stay of execution, and is not to be taken as a ground for refusing to make an order for winding up. The Commissioner, he says, is entitled to be paid, and remains unpaid. He is, therefore, entitled to choose to proceed to recover the amount due to him by way of a petition to wind up and, on proof of the necessary facts, to an order ex debito justitiae.

As to solvency, he submits that if the Commissioner's claim be a valid one the company is insolvent and that, by virtue of the provisions of the Income Tax Assessment Act, the claim must be treated as a valid one.

He submits that the fact that Mrs. Rutherford is such a substantial creditor and opposes the making of a winding up order ought not to persuade the Court to exercise its discretion against the petitioner. He points to her position as a director and shareholder of the company, and argues that I ought to discount her opposition.

Finally, counsel for the Commissioner submits that if I were minded to regard the matters advanced on behalf of the company as justifying the exercise of any discretion I have not to make a winding up order. I should adjourn the petition, in the meantime appointing a provisional liquidator who would ensure the assets were not dissipated.

As a general rule a creditor who cannot obtain payment is, as between himself and the company that owes the debt, entitled to a winding up order as a matter of right (
I.O.C. Australia Pty. Limited v. Mobil Oil Australia Limited (1975) 49 A.L.J.R. 176 at p. 182).

The reference in this formulation of the rule to a creditor who cannot obtain payment is appropriate to refer to a creditor who has not been paid although he is entitled to be paid and has demanded payment. It is not necessary for him to show that he has exhausted all other legal means of enforcing payment before resorting to a winding up petition. Although the Court sets its face against allowing the procedure of a petition to wind up to be used oppressively, it is nevertheless one of the options afforded by the law to a creditor who cannot obtain payment.

As to the argument that I should refuse to make an order in this case because it is opposed by Mrs. Rutherford, who is by far the major creditor, it is true that the Court is empowered by sec. 289 of the Companies Act, 1961, as to all matters relating to the winding up of a company to have regard to the wishes of creditors or contributories. The phrase ``all matters relating to the winding up of a company'' is not restricted in its application to matters arising after a winding up order has been made, but is appropriate to refer to matters arising after the presentation of a petition, including the question whether or not a winding up order should be made.

In the present case Mrs. Rutherford's position as director, shareholder, and first mortgagee, as well as the principal unsecured creditor of the company, makes it difficult to distinguish her position from that of the company itself. It is not a case where apart from Mrs. Rutherford and the Commissioner there are significant creditors whose wishes are to be considered. In the circumstances of the present case I have come to the conclusion that Mrs. Rutherford's opposition should not lead me to refuse to make a winding up order on the petition of the Commissioner.

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ATC 4116

The next question which arises is whether the amount claimed by the Commissioner should be treated as a disputed claim, and an order be refused on this ground. In one sense, of course, the Commissioner's claim is disputed, because appeals to the Board of Review have been lodged. However, the provisions of sec. 201 of the Income Tax Assessment Act require me to treat the debt as in effect undisputed. Such a statutory provision may in some cases lead to hardship on a taxpayer, particularly where he has paid the amount of tax assessed and later wins his appeal, whereupon the money is repaid to him without interest. This led Higgins J. in
Hickman v. F.C. of T. (31 C.L.R. 232 at p. 245) to describe it as ``unjust and even baneful'', but it remains in the Act. It must be appreciated that from the point of view of the revenue it is a protection against that class of taxpayer who might withhold payment and use the money as the sinews of war to conduct appeals against the Commissioner and who, being finally unsuccessful, was found to be unable to meet his tax liability, having spent his money on the litigation.

Whatever the merits or demerits of the provision may be, it will generally lead the Court to refuse a stay (
D.C. of T. (W.A.) v. Australian Machinery & Investment Co. Pty. Limited (1945) 8 A.T.D. 133;
Marina Estates Pty. Limited v. T.C. of T. 74 ATC 4166). Furthermore, where a taxpayer has been sued to judgment by the Commissioner, and has lodged an appeal, there being no stay of execution granted, the Commissioner will generally be entitled to a winding up order notwithstanding the appeal has been lodged and has not been heard. (In
re Amalgamated Properties of Rhodesia (1913) Limited (1917) 2 Ch. 115;
F.C. of T. v. Trautwein (No. 1) (1936) 56 C.L.R. 211).

I have come to the conclusion that the existence of the appeals to the Board of Review should not persuade me to refuse a winding up order.

As to the argument that the company is being deprived of the right to apply for time to pay which it would have been able to exercise if sued for the amount, I make two comments: first, the suggested right which I assume would be exercised by applying for a stay would only arise if the company were sued. It has not been sued, so the right does not arise. The Commissioner, as I have already indicated, is not obliged to sue. Secondly, even if the company were sued, the general attitude of the courts is to refuse a stay by reason of the provisions of the Income Tax Assessment Act. I have already referred to the authorities in this regard.

As to the solvency of the company, it appears to me that if the debt due the Commissioner under the assessments is to be regarded as a debt to be taken into account in determining whether or not the company is solvent I feel bound on the evidence to come to the conclusion that the company is insolvent. In view of the terms of sec. 201 of the Income Tax Assessment Act I consider I am obliged to consider the debts due under the assessments as debts to be taken into account in considering this matter.

As to the company's offer to give the Commissioner a second mortgage over its two freehold properties to secure payment of tax, it appears to me that this is a matter for the Commissioner to accept or to reject, and is not a matter which should persuade me to refuse a winding up order.

In particular I have in mind that there is no evidence before me as to the value of the properties beyond the note on the balance-sheet. The valuation by the valuers is not in evidence. I am unable to make any informed assessment of the worth of the offer. I have been supplied with no calculations as to what might be the sum, in addition to the Commissioner's claim at the time the petition was presented, which might need to be secured. With the lapse of time there may be additional amounts payable in respect of late payment and in respect of costs.

In view of the fact that the only substantial ``outside'' creditor is the Commissioner of Taxation, that the company desires to continue in operation and has expressed its willingness to give security for the amount which may be found to be due to the Commissioner, I am disposed, without making a winding up order at this time, to stand the matter over for fourteen days to enable the parties to consider the possibility of arriving at some interim arrangement. There would, I imagine, need to be offered to the Commissioner something more substantial than a second mortgage over the two properties to have any likelihood of gaining his agreement, and in the end it is a matter for him as to whether he enters into any arrangement or not.

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ATC 4117

When the matter is listed before me again after the expiry of fourteen days if the parties have not reached agreement I would propose to make a winding up order, and also an order for payment of the Commissioner's costs out of the assets of the company.