In the matter of Gurrawillie Street Pty Limited

1. [1]

   HER HONOUR: This is an application to terminate or stay the winding up of the defendant company, Gurrawillie Street Pty Ltd (in liquidation), under section 482(1) of the Corporation Act 2001 (Cth), which provides:

2. [2]

   The application is brought by Salah Alsader, who has standing to bring these proceedings as a creditor and contributory of the company: section 482(1A)(a). However, the way Mr Alsader has run the company to date is problematic and poses the challenge as to how to ensure that, going forward, the company’s affairs are regularised, its solvency is assured and third party creditors are not adversely affected.

Facts

1. [3]

   Mr Alsader is a carpenter and licensed builder. In 2015, the defendant company was incorporated and Mr Alsader became the sole officeholder and shareholder. In October 2015, the company purchased two properties in Villawood for $1.85 million. Mr Alsader, then aged 32, purchased the buildings without raising finance secured by a mortgage over the properties.

2. [4]

   The properties had the benefit of a development approval which permitted the demolition of two buildings on the properties and the construction of six townhouses. Each townhouse was to be a single storey dwelling with an attic. Mr Alsader proceeded to demolish the existing buildings and built the townhouses at a cost of $1.2 million, again, without raising construction finance secured by a mortgage over the properties.

3. [5]

   It appears from the company’s bank statements that a large number of deposits were made to the company's bank account, apparently to fund the construction. Affidavits were read by several people who provided these funds. They deposed that they extended loans to Mr Alsader in his personal capacity rather than to the company and thus their loans are not liabilities of the company. This was said notwithstanding that a caveat was registered on one of the properties citing a caveatable interest by reason of $250,000 having been advanced for the construction and development of the land. None of these witnesses were cross-examined and thus, accepting their evidence, a potential issue of concern is that Mr Alsader does not appear to have appreciated that there is a difference between the company's affairs, on the one hand, and his personal financial arrangements on the other.

4. [6]

   In addition, Mr Alsader decided to maximise the value of the townhouses by constructing two storey dwellings rather than the approved single storey dwellings with attics. In November 2016, the local council inspected construction and observed that the townhouses were not being built in accordance with the approved plans. In February 2017, Council sent a letter to Mr Alsader proposing an order for rectification works under the Environmental Planning and Assessment Act 1979 (NSW). After receiving notice of the proposed rectification order, Mr Alsader met with architects and town planners to consider the way forward. Mr Alsader’s architect advised that it would be open to apply for a modification of the development approval under the Environmental Planning and Assessment Act. However, instead of doing this, Mr Alsader continued to build the townhouses in the way he thought best with the intention to apply for a modification of the development approval when he had finished.

5. [7]

   Throughout 2018, Mr Alsader met with various town planners and development consultants in an effort to progress the modification application. In mid-2018, his architect applied to modify the development approval. Mr Alsader also marketed the townhouses for sale and exchanged contracts on three of the six townhouses, notwithstanding that the dwellings did not comply with planning approval.

6. [8]

   In January 2019, Council recommended that the modification application be withdrawn else it would be refused. Mr Alsader took advice from architects and lawyers regarding his options, including commencing proceedings in the Land and Environment Court. By mid-2019, Mr Alsader had decided to rectify the townhouses to comply with the council's original development approval. Mr Alsader says it took some time to rescind the contracts for sale although, as I understand the evidence, one of the contracts for sale remains on foot.

7. [9]

   It is apparent from the company’s bank statements that, throughout 2019, the company's bank account did not have sufficient funds such that the bank regularly imposed additional fees. The Commissioner for State Revenue arranged for a garnishee order to be applied to the company’s bank account, with little result.

8. [10]

   By mid-2019, that there were also unpaid utility bills for water and gas. The usage details on utility bills suggest that the townhouses were being occupied notwithstanding that the dwellings did not have an occupation certificate. Photographs more recently obtained by the liquidator from Google Earth show cars and boats parked at the properties. Mr Alsader says that he parks vehicles on the property to reduce the chance of vandalism of vacant premises. However, photographs attached to a recent valuer's report depict not only motor vehicles but outdoor chairs and an object that appears to be either a pram or a lawn mower. Thus, there is some evidence that the townhouses have been occupied but there is no rent recorded in the company's bank statements.

9. [11]

   In July 2019, the Chief Commissioner of State Revenue issued a statutory demand to the defendant company for unpaid land tax totalling some $20,000. The statutory demand was served at the registered office of the company, being the family home at which Mr Alsader had lived with his father and siblings. Mr Alsader says he was not aware that the family home was the registered office of the company and thought that it was the office of the company's accountants. In any event, there was an informal practice in place at the family home that, when mail arrived for any of the children, his father placed it on a table in the spare room. When they visited the home, the children sorted through the mail to find any letters addressed to them. Notwithstanding this family practice, Mr Alsader says that the statutory demand did not come to his attention.

10. [12]

    In November 2019, the Chief Commissioner of State Revenue filed an originating process seeking to appoint a liquidator by reason of non-compliance with the statutory demand. The originating process was served at the registered office of the company but Mr Alsader says that it did not come to his notice either. There was no appearance for the company on 9 December 2019 and the Court appointed Bruce Gleeson of Jones Partners as liquidator to the company. This came to the attention of Mr Alsader on 20 December 2019, when his solicitor forwarded a letter from the liquidator requesting the books and records of the company.

11. [13]

    Mr Alsader then took prompt action to bring this application, seeking to file on 23 December 2019 an Interlocutory Process to stay or terminate the winding up of the company. A substantial amount of evidence has been relied on by the applicant in support of this application, comprising 18 affidavits from 12 witnesses.

12. [14]

    The company has never filed any income tax returns. Mr Alsader's explanation for not filing tax returns is that he was consumed and distracted by various complexities in respect of the construction onsite, which he says have now been resolved. This explanation is not particularly compelling as most directors are absorbed in the activities of the companies for which they are a director but are nonetheless obliged to comply with their obligations in respect of tax affairs. Another reason why it was said that the company had not lodged any tax returns was that the company has not generated any income as its sole income will be derived from the sale of the townhouses. However, it does appear that the company generated income in the first financial year of its existence, when it received a payment of some $630,000 in February 2017 for building work done in respect of another construction in Chester Hill.

13. [15]

    On 20 February 2020, tax returns, financial statements and outstanding Business Activity Statements (BAS) were prepared for the company by its accountant. Mr Alsader says the tax returns and financial statements are correct but will not be signed until the winding up is terminated. The liquidator has not been able to independently verify whether the tax returns and financial statements are correct as he has not had access to the source documents.

14. [16]

    The liquidator has had some difficulty obtaining books and records from Mr Alsader. A Report on Company Activities and Property (ROCAP), a document to be completed by directors when a company is placed into liquidation for submission to the Australian Securities and Investments Commission (ASIC), was partially completed by Mr Alsader on 11 February 2020. On 5 March 2019, the liquidator's solicitors wrote to the applicant's solicitor asking for the ROCAP to be completed and requested copies of various documents referred to in the applicant's evidence filed in support of this application, including the proposed rectification order, council approved plans and details of deposits paid into the company's account. Some of this material was provided by the applicant's solicitor on 16 March 2020 but missing material was sought again by the liquidator on 20 March 2020.

15. [17]

    Adam Abdo, the company's accountant, expressed the view that the company is solvent, although he does not elaborate as to whether this is on a balance sheet or cash flow basis, nor provide any reasons for this view. The liquidator says that Mr Abdo's opinion should be considered cautiously. I agree.

16. [18]

    The creditors of the company have been notified of this application, as has ASIC. No creditor has voiced objection to the orders now sought. ASIC has indicated that it is a matter for the Court.

17. [19]

    An important consideration on an application such as this is the attitude of the liquidator. Mr Gleeson neither consents nor opposes the application. Mr Gleeson is satisfied that the company is solvent on a balance sheet basis. The more important metric, of course, is whether the company is solvent on a cash flow basis. Mr Gleeson says that the company's solvency on a cash flow basis depends on both the deferral of large debts owed to Mr Alsader and to another creditor of the company, Khaled Ali. It is also dependent upon the realisation in the immediate future of the main asset of the company, being the six townhouses. Mr Gleeson expressed some concerns about the delay in the completion of the ROCAP and being provided with documents to enable him to verify the company’s financial position in respect of the rectification work needed to ready the townhouses for sale.

18. [20]

    Matters have since been clarified to some extent. Mr Alsader has obtained a valuation report of the townhouses on the assumption that the rectification works is completed. A quantity surveyor's report has been obtained calculating the cost of rectification at some $70,000. A structural engineer has also certified some of the building elements. Mr Abdul-Hadi Moussa, a structural engineer, has given expert evidence that it will take between four and six weeks to obtain an occupation certificate and a further four weeks to register a plan of subdivision. A local real estate agent has estimated that the sale period for the townhouses will be between one and two months. One of the creditors, Mr Ali has deposed that he is willing to extend the repayment date of monies owing to him without interest until 30 June 2021. Mr Abdo has also provided an estimate of the tax which will be payable on lodgement of the tax returns and on completion of the development.

19. [21]

    Mr Alsader has said that he will change ASIC’s records in respect of the registered office of the company to his current address. Mr Alsader has offered various undertakings to lodge outstanding tax returns and BAS statements, to sign the draft financial statements of the company and to take the development forward to rectification and completion. The applicant's solicitor has tendered a trust account statement which shows that they presently hold over $300,000, which funds are sufficient to pay the creditors of the company apart from the applicant and Mr Ali, pay the costs of rectifying and selling the townhouse development as well as the liquidator’s remuneration and disbursements. The applicant's counsel has advised the Court that Mr Alsader is prepared to advance these monies to the company as a subordinated loan or, if preferred, by subscribing further capital in the company. The latter course is certainly a simpler way to proceed: see for example, Australian Gemstone at [38]; and In the matter of Parkway One Pty Limited (in liquidation) [2019] NSWSC 1495 at [76]-[77].

Legal principles

1. [22]

   There is no disagreement between the parties as to the relevant principles. In exercising its discretion on such applications, the Court traditionally turns to the principles set out by Master Lee in Re Warbler Pty Limited (1982) 6 ACLR 526, being:

2. [23]

   As Brereton J put the matter succinctly in In the matter of Glass Recycling Pty Limited [2014] NSWSC 439 at [18]:

3. [24]

   And even more succinctly In the matter of JD & RS Pty Ltd [2016] NSWSC 806 per Brereton J at [2]:

4. [25]

   In terms of commercial morality and drawing on my judgment in the matter of In the matter of Falcon Corp Pty Limited [2020] NSWSC 288 at [21]-[27] 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:

5. [26]

   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].

6. [27]

   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]:

7. [28]

   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]. 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.

8. [29]

   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.

Consideration

1. [30]

   I am assisted by careful and detailed submissions by both the counsel for Mr Alsader and the liquidator. It was submitted by the applicant that he has demonstrated an ability to successfully and properly manage the affairs of the company in the past, in the sense of successfully acquiring the property, developing it and constructing the townhouses to the stage of practical completion and by raising funds from third parties without encumbering the property. I think the evidence reveals the applicant has had mixed success in this regard.

2. [31]

   It was submitted by the applicant that the strength of the company's financial position is demonstrated by the absence of any mortgage over the properties and the fact that Mr Ali, the only third party creditor, is willing to extend his loan without interest. It does appear that there are a large number of informal lending arrangements behind the company. I am not sure that is necessarily a strength.

3. [32]

   The key questions are whether the Court is satisfied that the company is and will remain solvent if the winding up is terminated and whether any issues of commercial morality tell against this course. As to solvency, there is no doubt that the company is solvent, but only if it completes and sells the development using the additional funds provided by Mr Alsader. The question is, essentially, who should do this. If the company remains in liquidation, then Mr Gleeson has said that this is what he intends to do. That course has advantages and disadvantages. The advantage is that the liquidator, as an officer of the Court, can be expected to retain qualified builders or consultants to complete the rectification works properly. The disadvantage is that it adds a layer of cost to the exercise which one would wish to avoid if possible. If the winding up is stayed or terminated, then Mr Alsader has proffered an undertaking to complete this task himself. It is in Mr Alsader's interests to complete this task with the least cost to the company. He is a licensed builder. The disadvantage is that the evidence suggests that Mr Alsader has not progressed this matter satisfactorily for the last three years; that may not fill one with confidence.

4. [33]

   As to commercial morality, it will be clear from what I have already said that I have some concerns as to how the company has been operated to date. There has been a failure to lodge any tax returns. The explanation for not having received key commercial documents such as a statutory demand and an originating process to appoint a liquidator is not particularly compelling. There is a lack of proper accounting, partial non-provision of information to the liquidator, and generally embarking upon a significant corporate venture without much regard for local government approvals.

5. [34]

   Looking at all of these factors together, what I am minded to do is to follow the course adopted by Gleeson JA In the matter of CNL Transport Pty Ltd (in liq) [2017] NSWSC 291. In that case, the director's non-compliance with corporate responsibilities appears to have been far more confined and perhaps better explained on the evidence than here. His Honour was minded, rather than to terminate the liquidation, to stay the liquidation for a period, grant leave to the director to take particular steps in the meantime to regularise the company's affairs and then, in the event that the director did what he said he would do, to indicate that he would then terminate the winding up.

6. [35]

   I am attracted to that course in this case because I am concerned that, given the way the company has been operated for the last few years, if I make orders which essentially pay the company's current creditors other than the applicant and Mr Ali and accept Mr Alsader's undertaking to rectify the development and sell it, the Court has limited ability to oversee compliance with those undertakings.

7. [36]

   This is particularly important here because the company is only solvent if it completes the development and sells it in the very near future. If the applicant does not comply with his undertaking, then third party creditors may suffer loss. That is what the Court must be careful to avoid when considering applications to terminate the winding up of a company. As Gleeson JA expressed the matter in CNL Transport at [32]-[33]:

8. [37]

   What was also important to Gleeson JA in CNL Transport was that the amount which the director was called upon to contribute to the company to regularise its affairs was a significant sum. Thus his Honour preferred to proceed by granting leave to attend to the steps necessary to regularise the affairs of the company rather than simply accept an undertaking by the director, being the course undertaken by Brereton J in In the matter of Glass Recycling Pty Limited [2014] NSWSC 439 where the tasks to be undertaken by the director could be attended to within a couple of days and involved amounts of money which were not too prohibitive.

9. [38]

   For these reasons the following orders were made in Chambers, as agreed to by the parties, at the adjournment of the proceedings:

   1. (1)

      Pursuant to section 482(1) of the Corporations Act 2001 (Cth), stay the winding up of Gurrawillie Street Pty Ltd (in liquidation) (the Company) until 15 October 2020.

   2. (2)

      Pursuant to section 198G(3)(b) of the Corporations Act 2001 (Cth), approve the Company’s director, Salah Alsader, performing and exercising his powers as a director to:

   3. (3)

      Direct the Third Respondent, or members of his staff, to deliver the bank cheques to the persons or entities in the table in Order 2(e) forthwith after receipt of those bank cheques in accordance with Order 2(e).

   4. (4)

      Direct the Applicant to file and serve an affidavit by 4pm on 12 October 2020 deposing to performance of the steps referred to in Order 2.

   5. (5)

      Stand the matter over to 9.30 am on 15 October 2020 before Rees J for the purpose of:

   6. (6)

      Pursuant to sections 7 and 8 of the Court Suppression and Non-Publication Orders Act 2010 (NSW), order that publication of the following evidence and submissions be suppressed and any disclosure of that material be prohibited until further order of the Court:

   7. (7)

      Liberty to apply.