NEWS LETTER SPRING 2008
15 10 2008
This publication produced by Foremans Business Advisors specifically focusing on insolvency issues relevant to accountancy practices and their clients. In this edition we look at Deeds of Company Arrangement, an underutilised restructuring option available to financially distressed companies and winding up proceedings instigated by the Australian Taxation Office even when the taxpayer has a valid appeal with the AAT or Federal Court.
A RESTRUCTURING OPTION FOR YOUR CLIENT
"THE DEED OF COMPANY ARRANGEMENT"
Given the current economic outlook, increased financial pressure is being felt by a large percentage of (if not all) businesses throughout Australia (and globally). Australian legislation provides to directors, creditors and all other stakeholders of companies an avenue of restructuring referred to as the Deed of Company Arrangement (DOCA).
A DOCA is one of the three (3) options that creditors may accept at a second meeting of creditors under the Voluntary Administration regime. The purpose of a DOCA is to formalise a proposal generally put forward by the directors of the company but which, in theory, can be put forward by any party (e.g. shareholders, creditors and other third parties).
The DOCA is subject to creditor approval but is a useful tool that is best applied by early intervention in recognising the potential insolvency of an entity and by reacting sooner rather than later increasing the prospects of the survival of the business into the future.
Given the flexible nature of a DOCA, it can:
- allow for the implementation of a revised business plan and strategy to return the business to profitability; and
- increase the return to creditors as compared to that which creditors would expect to receive should the company have to be wound up.
Like most things in life, timing is vitally important in any restructuring effort. Therefore early recognition of problems that may be facing a company is paramount. Remember that a DOCA can essentially be any form thus making it a very attractive proposition to directors who may be suffering short term liquidity problems at the present time but have an expectation of being able to survive into the future given certain variables. A DOCA is subject to approval by creditors and the execution of the DOCA by the company.
A thank you to Michael Murray of the IPA for this article
WINDING UP DEMANDS AND THE POSITION OF THE AUSTRALIAN TAXATION
The High Court has given a decision that confirms the ability of the ATO to rely upon a winding up demand even if the debtor company is validly appealing to the AAT or the Federal Court about the tax assessment upon which the demand is based.DCT v Broadbeach Properties Pty Ltd [2008] HCA 41
Such an appeal provides no basis of challenge to the demand on the "genuine dispute" ground under s 459H of the Corporations Act nor does it provide "some other reason" under s 459J to set the demand aside.
In Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 the Full Federal Court had held that a company which is pursuing such an appeal cannot argue that there is a "genuine dispute" concerning the existence or amount of the tax debt under s 459H. This is because the company in those circumstances is prevented by s 177 of the Income Tax Assessment Act 1936 from challenging the assessment. That section says that a tax assessment is conclusive evidence of the correctness of the assessment, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal to the AAT or the Federal Court. Thus a presumption of insolvency from failure to pay the demand will arise.
But in Neutral Bay Pty Ltd v DCT [2007] QCA 312 the Queensland Court of Appeal declined to follow Hoare Bros, saying that the decision cannot be justified either by the language of the taxation legislation or the language of s 459H of the Act; and that a winding up demand could in any event be set aside "for some other reason" under s 459J(1)(b).
On appeal to the High Court by the ATO (Neutral Bay being one of the companies the subject of the appeal), the High Court has disagreed with the Queensland Court of Appeal.
In effect, the High Court has endorsed the law as stated in Hoare Bros.However, the High Court pointed out that an AAT or Federal Court appeal by the company remains a relevant consideration at the hearing of the winding up application.
While the ATO can rely on the presumption of the company's insolvency from failure to pay the demand, the Court can nevertheless exercise its discretion not to wind up the company on the basis of the pending appeal or review. This was in fact an important concession made by the ATO at the hearing. That concession was made in accordance with the law that an insolvency court retains an ultimate discretion whether to make a winding up order. That discretion also applies in bankruptcy in relation to tax debts: see Ahern v DCT (1987) 76 ALR 137.
If you have any questions concerning the above topics or about insolvency matters generlly, please contact:-
Carins - Call Todd Kelly or Peter Morris to arrange a free consultation on 07 4052 1655
Melbourne - Call Dean McVeigh, Craig Bolwell or Vincent Savage to arrange a free consultation on 03 9521 6662