In the matter of Falcon Corp Pty Limited

1. [1]

   HER HONOUR: This is an application under section 482(1) of the Corporations Act 2001 (Cth) to terminate the winding up of the defendant company, Falcon Corp Pty Limited (in liquidation). The applicant, Michael Saba, is the sole officeholder and shareholder of that company and, as a contributory, has standing to bring this application. Peter Hillig is the liquidator of Falcon Corp.

Appointment of liquidator

1. [2]

   The circumstances in which Mr Hillig was appointed bear repeating. Since Falcon Corp was incorporated in 2010, Mr Saba has been the sole officeholder and shareholder of the company with an address registered with the Australian Securities and Investments Commission (ASIC) in Blacktown Road, Prospect. Since 2014, that address has been the registered office and principal place of business of Falcon Corp.

2. [3]

   Falcon Corp is the corporate trustee of the Falcon Trust. The beneficiaries of the trust are Mr Saba, any spouse, children or kin and other nominated beneficiaries. The only business of Falcon Corp is to act as corporate trustee of the Falcon Trust. As trustee, Falcon Corp owns three real properties: one in Granville and two in Kingswood. The properties are presently estimated to be worth between $3 million and $4 million. Falcon Corp has a secured creditor, being Westpac Banking Corporation, who is presently owed some $1 million.

3. [4]

   It appears that the company's affairs have been untended for at least three years. The company did not file any Business Activity Statements or tax returns for the financial years ended 2017, 2018 and 2019. It is apparent from Mr Hillig's affidavit that, during this period, the company came to owe moneys to the Australian Taxation Office (ATO), ASIC, the Chief Commissioner of State Revenue, Parramatta City Council and the company's accountants. Since 2018, the company's facilities with Westpac have been with the bank’s Business Recovery Team. ASIC was in the process of deregistering the company.

4. [5]

   On 5 August 2019, Parramatta City Council issued a statutory demand to the company for $16,115.27 for outstanding rates. On 22 August 2019, the statutory demand was served by affixing it to the front door of the property in Blacktown Road, Prospect. On 14 October 2019, Parramatta City Council commenced these proceedings seeking to appoint a liquidator. On 15 October 2019, ASIC deferred its registration action pending the outcome of these proceedings.

5. [6]

   On 17 October 2019, the originating process was served by slipping it under the front door of the property in Blacktown Road, Prospect. The process server, whose evidence was read on the application to appoint a liquidator, noted that there was no response to knocking the door but he could hear dogs barking inside and someone saying "shhh". There was a motor vehicle present at the premises.

6. [7]

   On 13 November 2019, there being no appearance on behalf of the company, a Registrar of this Court appointed a liquidator. The same day, Mr Hillig wrote to Mr Saba requesting that the books and records of the company be provided to him and that he complete a Report on Company Activities and Property (ROCAP). There was no response.

7. [8]

   On 22 November 2019, Mr Saba says that he first learned that the company had been placed into liquidation when he received a message from the company's accountant. He could not explain why the council's rate notices had not been received by him or paid when due. Mr Saba attended at Parramatta City Council and paid the outstanding rates.

8. [9]

   On 27 November 2019, Mr Hillig met with Mr Saba's solicitor, Jared Zak, who advised that Mr Saba was suffering from agoraphobia. A telephone call was made from Mr Hillig's office to Mr Saba and Mr Hillig's note records:

9. [10]

   On 11 December 2019, Mr Hillig sent a second request to Mr Saba for the books and records of the company and a completed ROCAP. There was no reply.

Application to set aside appointment of liquidator

1. [11]

   On 17 January 2020, an interlocutory process was filed in these proceedings seeking to set aside the orders of the Registrar. According to the Court file, on 2 February 2020, Mr Saba's solicitor filed a Notice of Ceasing to Act as he was no longer receiving instructions in the matter. The last known address for Mr Saba as recorded on the notice was the property in Blacktown Road, Prospect.

2. [12]

   On 27 February 2020, the company's accountant provided the company's solicitors with income tax returns for Mr Saba, the company and the trust for financial years ended 2017, 2018 and 2019. Draft financial statements were provided for each of these financial years and also management accounts up to 12 November 2019. These financial statements have not been signed and Mr Saba does not say anything as to their contents other than that he instructed his accountant to prepare them. Business Activity Statements for thirteen quarters were also provided.

3. [13]

   On 5 March 2020, Mr Hillig wrote to the solicitor for Parramatta City Council advising him of the application now before the Court. Mr Hillig noted:

4. [14]

   On 9 March 2020, Mr Saba swore an affidavit setting out the financial position of the company. Mr Saba does not propose any change in the company's management going forward, nor explains how it is that the company's affairs fell into such disarray.

5. [15]

   In recent times, Mr Saba has attended to payment of all of the company's creditors. He has also placed money in his solicitor's trust account to pay the liquidator's remuneration and disbursements.

6. [16]

   More recently, Mr Saba's solicitors wrote to Westpac saying that, due to Mr Saba's health issues “which I have no doubt Westpac personnel have notice of”, it was not possible to get him to sign an authority and “he is difficult to contact on the phone”. Westpac replied noting that, if the Court terminates the liquidation, then the bank will provide assistance on the basis that all arrears are cleared, interest only repayments are made either in advance or each month as the interest is payable, a forbearance period of a minimum of three months, loans to be repaid by the end of this forbearance period, and a deed of forbearance being entered into.

7. [17]

   The liquidator has reached the view that the company is solvent: roughly speaking, the net assets of the company and the trust appear to be some $2 million to $3 million.

8. [18]

   At the hearing, leave was granted to amend Mr Saba’s notice to seek an order under section 482(1) of the Corporations Act. It was ably submitted on behalf of Mr Saba that the experience of the company being placed in liquidation has presented a huge learning exercise for Mr Saba and has also been a costly experience. It was submitted that the activities of the company were simple and the orders which are now sought should be made. Mr Hillig does not oppose the application to terminate the liquidation but has expressed reservations about Mr Saba's ability to comply with his statutory duties when he was acting as director.

Termination of a liquidator

1. [19]

   I set out the principles in respect of termination of a winding up In the matter of Parkway One Pty Limited (in liquidation) [2019] NSWSC 1495 at [75]-[85]. As Brereton J put the matter in In the matter of Recycling Glass Pty Limited (ACN 001 332 654) [2014] NSWSC 439 at [18]: (citations omitted)

2. [20]

   His Honour also noted (at [19]–[22]) that the interests of future creditors was also relevant, that is, the Court seeks some comfort that such a state of affairs is not likely to recur in the foreseeable future. The Court requires evidence that demonstrates not only that the company is, but also that it is likely to remain, solvent. In Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127, Barrett J noted, at [3]:

3. [21]

   As to what commercial morality means, an oft-cited passages is that of Buckley J in In Re Telescriptor Syndicate Limited [1903] 2 Ch 174 at 180:

4. [22]

   The particular role of the Court in considering this issue on applications to terminate a winding up, where there are often no contradictors, was described by Palmer J in In the matter of Modena Imports Pty Ltd (in liq) [2010] NSWSC 739. At [8]-[9].

5. [23]

   For example, in Metledge v Bambakit Pty Ltd [2005] NSWSC 160, Barrett J referred to a number of matters within the scope of “commercial morality”: the director did not recognise any line of demarcation between the affairs of the company and himself; the director failed to comply with his obligations with respect of a report as to affairs and delivery of books and records to the liquidator; the director demonstrated commercially “sloppy” behaviour including operating the business under a business name, the registration of which had expired. At [35]–[36]:

6. [24]

   His Honour considered that it was likely that the company had never kept adequate books and records, and the prospects of the director doing so on termination of the winding up were “remote”. He has “shown himself to be unconcerned about the responsibilities that attach to the office of company director …”: at [37].

7. [25]

   Similarly, Black J refused an application to terminate a winding up by reason of “commercial morality” in In the matter of 311 Hume Highway Liverpool Fund Pty Ltd (in liq) (2013) 93 ACSR 683; [2013] NSWSC 465, because of a failure to maintain or to produce to the liquidator books and records of the company, with no adequate explanation of this failure: at [26]–[28].

8. [26]

   Breaches of legislation other than the Corporations Act may be relevant to the question of commercial morality. In Stolar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq) [2011] VSC 577, the company’s breaches of taxation and superannuation requirements were considered pertinent.

9. [27]

   While the notion of commercial morality is obviously a broad one, the cases may perhaps be distilled to two key enquiries. First, was the director’s behaviour unsatisfactory having regard to their duties as a director under the Corporations Act as well as basic concepts of honesty and competence: do they understand the nature of a corporation and the content of their duties as a director? A recurring theme is the importance of the duty to keep proper books and records, the duty not to trade while insolvent and the duty of cooperation with the liquidator but breaches of laws other than the Corporations Act, especially taxation legislation, are also relevant. Second, if breaches have occurred in the past, has a good explanation been proffered? Does the director understand that the events which occurred were unsatisfactory? What steps have been taken to mitigate or cure the breaches, or, conversely, is it likely that breaches will recur in the future.

Application to this case

1. [28]

   The requirement to establish solvency has been established here. However, the question of commercial morality has given me pause for thought, as it has the liquidator. There can be no doubt that the director's behaviour was unsatisfactory having regard to his duties as a director under the Corporations Act as well as basic concepts of competence. Here, it seems that the director's behaviour has been unsatisfactory for at least three years. Mr Saba does not appear to have attended to the obligations of dealing with important correspondence such as statutory demands or originating processes, attending to payment of routine bills or lodging tax returns. These are the basic building blocks of a corporation’s life. It does not matter that the business affairs of the company are simple; the fact is that Mr Saba does not appear to be capable of attending to these simple tasks himself.

2. [29]

   It is not clear to me that Mr Saba understands the content of his duties as a director. On the limited evidence available, it does not appear that Mr Saba has kept proper books and records. Of concern is that Mr Saba did not respond to the liquidator's request for books or records or to complete a ROCAP. These are strict liability offences under section 475(10) of the Corporations Act. Nor has he complied with other legal obligations in respect of tax.

3. [30]

   No good explanation has been proffered. Beyond Mr Saba saying, in unclear terms, that he did not become aware of the originating process, Mr Saba has not given a detailed explanation as to why things have gone so awry, nor shown any apparent appreciation that his conduct as a director has been seriously lacking in the past. I do not presently have any confidence going forward that Mr Saba will do any better.

4. [31]

   I am reluctant to wind up a company which is solvent, which is the trustee of a trust which contains assets which no doubt have been acquired by reason of Mr Saba's business decisions in the past and which should stand to benefit him and other beneficiaries of the trust. But nor can I let a corporation continue whilst, at its helm, is a director who does not seem to be capable of fulfilling that role. It may well be that Mr Saba has amongst his family or professional relationships a person that he is comfortable to have appointed as a director of the company.

5. [32]

   There also needs to be put in place proper arrangements so that mail is opened and answered, bills are paid in a timely manner and Business Activity Statements and income tax returns are lodged when due. There may well be people who Mr Saba can authorise to attend to these tasks on his behalf. Some of these matters may indeed be able to be attended to by the managing agents already appointed to manage the three properties owned by the company.

6. [33]

   Thus, what I propose to do is, rather than dismiss the application out of hand today, I will give Mr Saba an opportunity to put forward alternate arrangements for the management of the company going forward which, if satisfactory to the liquidator and the Court, may provide sufficient comfort that the company’s affairs will be properly managed going forward sufficient to terminate the winding-up.

7. [34]

   In this matter I make the following orders:

   1. (1)

      Direct the applicant to file and serve, by 4.00 pm on Monday 6 April 2020 by email to the Associate to Rees J copied to the legal representatives for the defendant, any further affidavits or proposed Short Minutes of Order which:

   2. (2)

      Direct Peter Hillig, as liquidator of the defendant, to inform the Chambers of Rees J by 4.00 pm, 15 April 2020 of his attitude to any further affidavits and proposed Short Minutes of Order by email to the Associate to Rees J copied to the legal representatives of the applicant.

   3. (3)

      Adjourn hearing of this application to 10.00 am on 17 April 2020 by telephone.