Court considers termination of a DOCA on public interest grounds

The decision in Commissioner of State Revenue v McCabe (No 2) [2024] FCA 662 (McCabe) serves as an important reminder that commercial morality is to be considered as a factor under the “public interest”, rather than a separate consideration relevant to termination of a DOCA under s 445D of the Corporations Act 2001 (Cth). In McCabe, the Commissioner’s s 445D challenge to the DOCA was entirely unsuccessful.

Background

Various companies were incorporated over time, with operations linked to the Comlek business since at least January 2007. By July 2013, three companies (the Deregistered Entities) owed $748,867.10 in payroll tax but were deregistered without filing returns. Another group within the Comlek business, the Island Entities, had also accrued payroll tax liabilities and filed for voluntary deregistration.

In September 2022, the Commissioner issued assessment notices totalling $10,073,318.28 (the QRO debt) to most of the Comlek Companies and the Comlek Partnership. These liabilities were not recorded in the companies' books. Investigation notices in September 2022 alleged deliberate tax defaults and improper business structuring. Garnishee notices were issued to banks, and by November 2022, $810,984.24 had been received, with $9,321,150.11 still outstanding.

Directors resolved to place the Comlek Companies into voluntary administration on 5 December 2022. At a meeting of creditors, a DOCA proposed by directors was approved by creditors, with the Commissioner as the sole dissenter. Mr McCabe used his casting vote to pass the resolution. The DOCA was executed on 9 February 2023. As of February 2024, three of the Comlek Companies (the Trading Companies) were trading and profitable.

Issues

The key issues before the Court were whether:

1. the DOCA be terminated under section 445D(1)(a)-(g) or 447A of the Corporations Act 2001 (Cth) on public interest grounds;
2. Mr McCabe casting his vote in favour of the DOCA at the creditor’s meeting should be set aside; and
3. the Trading Companies should be wound up.

Determinations

The Commissioner argued that it was in the public interest for the DOCA to be terminated, as the Comlek Companies’ affairs needed to be investigated by a liquidator, the second report to the creditors was false and misleading, there was a material admission from the report, the DOCA was unfairly discriminatory against the Commissioner, and subsequently, the exercise of the casting vote by Mr McCabe was inappropriate and the trading companies should be wound up.

The Court dismissed the application in its entirety.

The Court found that the Commissioner did not satisfy the burden of proof to establish grounds under s 445D(1) to justify terminating the DOCA. When considering the public interest under s 445D(1)(g), the Court made clear that it was against the public interest to wind up solvent companies (the Comlek Companies had been trading solvently for more than a year after the DOCA was adopted) and make in excess of 80 employees redundant. Specifically, notions of commercial morality are not to be considered separately from the public interest.

Although the Commissioner did establish that there was a material omission in the report to creditors, being that the Commissioner had concluded that the Comlek Companies had committed deliberate tax defaults and tax evasion, the Court declined to exercise its discretion to terminate the DOCA in light of the Court’s finding that the DOCA should not be terminated on public interest grounds. Additionally, the Commissioner did not meet the burden of proof to prove that the DOCA should be terminated to facilitate liquidator investigations due to a lack of evidence adduced by the Commissioner as to how the payroll tax debt was allowed to escalate to almost $10 million before the Comlek Companies were informed that they had been in default for almost a decade, the fact that the Comlek Companies had paid the payroll tax they were aware of, and approximately 70 per cent of the QRO debt comprised interest and penalty tax accrued because the Commissioner did not alert the Comlek Companies of the tax defaults.

The Court rejected that the DOCA unfairly discriminated against the Commissioner as a creditor, noting that the Commissioner had received 100 cents on the dollar for part of the debt through garnishee notices, and there was no evidence that the DOCA would leave creditors worse off than liquidation.

The Court determined that as the report to creditors noted that the QRO debt had not been recorded within the report, creditors could not have been misled about the fact that the liability had not been recorded and did not prove that the Comlek Companies financial records were not properly maintained. The Court rejected the Commissioner’s argument that the report relied on by the creditors was false and misleading.

Insolvency & Restructuring Case Summaries

Our Restructuring & Insolvency team members are busily preparing the 2024 version of our annual publication, Insolvency & Restructuring Case Summaries. The useful resource highlights the key takeaways from 2024 decisions and the practical implications they have for insolvency practitioners. The comprehensive resource will be launched early in the new year. In the meantime, you can revisit our 2023 Case Summaries (published in March 2024).