Re: DEPUTY COMMISSIONER OF TAXATION

And: BEST AND LESS (WOLLONGONG) PTY LIMITED (RECEIVER and MANAGER and BRIAN

SILVIA

NoS. 3140-3149 of 1991

FED No. 34

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

Lockhart J.(1)

HEARING

SYDNEY

#DATE 10:2:1992

Counsel for the Applicant: A.H. Slater

Solicitors for the Applicant: Australian Government Solicitor

Counsel for the First and T.F. Bathurst QC with

Second Respondent: A.J.L. Bannon

Solicitors for the First

and Second Respondent: Dibbs Crowther and Osborne

Counsel for Secured Creditor

Mogul Stud Pty Ltd: R.F. Edmonds

Solicitors for Secured Creditor

Mogul Stud Pty Ltd: Minter Ellison

JUDGE1

The receiver and manager of companies within the Best and Less Group applies to the court for a direction pursuant to section 424 of the Corporations Law that he is justified in accepting an offer made by Mr Berel Ginges to acquire the assets of the Best and Less Group. The Deputy Commissioner of Taxation, who is an unsecured creditor of members of the Best and Less partnership, opposes the application, principally on the ground that the application is premature. The Best and Less Group includes ten of its companies that carry on the business in partnership of retail clothing stores in three States of Australia.

2. The total tax due under amended assessments to income tax which were issued by the Deputy Commissioner in October 1991 in respect of the years of income from 1 July 1975 to 30 June 1990 to members of the partnership is in excess of 45 million dollars. I understand that those assessments are under challenge by way of appeal under the Income Tax Assessment Act 1936. The Deputy Commissioner is the major, if not the only, unsecured creditor of the partnership companies except for current creditors of the receivership. On 6 November 1991 the Court heard and refused an application by the Deputy Commissioner to appoint a provisional liquidator of each of the ten partnership companies. The Court declined to appoint a provisional liquidator for the reasons given on that day.

3. Some of the matters referred to by the Court in its reasons for judgment of 6 November are relevant for present purposes, at least as part of the background, and it is useful to restate certain of them. The principle persons involved in the affairs of the companies appear to be Mr Albert Scheinberg; his son, Richard Scheinberg; Agnus Ginges; her husband, Berel Ginges; and Annette Dunkel, the wife of Michael Dunkel who is the solicitor acting for the companies in various matters.

4. On 29 June 1989 members of the partnership entered into an agreement with the State Bank of New South Wales, ("the State Bank") for the provision of a commercial bill facility which was varied by deed of 15 September 1989. Under that agreement, bills were drawn to fall due in December 1991.

5. On 22 August 1991 the first of two lots of assessments to income tax were issued by the Deputy Commissioner to a company, Propend Finance Pty Limited ("Propend"), which is one of the companies in the Scheinberg/Ginges family group of companies and which is also the subject of an audit by the Commissioner. These assessments had the effect, including penalties, of increasing the tax payable by Propend for the years ended 30 June 1982 to 30 June 1990 to an amount in excess of 49 million dollars. On 5 September 1991 Mr Richard Scheinberg telephoned an officer of the ANZ Bank Group Limited ("the ANZ Bank") seeking stand-by facilities for the purpose of assisting Mogul Stud Pty Limited ("Mogul Stud") in its proposed purchase of the debts and the securities held by the State Bank under a facility agreement with the partnership.

6. Mogul Stud is a company having some affiliation with Mr Richard Scheinberg who is one of its directors. The purpose of the purchase was said to be to restructure the financing of the Best and Less Group. On 3 October Mr Dunkel wrote to the State Bank confirming a conversation earlier that day that Mogul Stud wished to acquire the State Bank's debts and securities as quickly as possible. Also on 3 October, assessments to income tax were issued by the Deputy Commissioner to the members of the partnership of the Best and Less Group for the years ended 30 June 1976 to 30 June 1989. By 7 November 1991 the amount payable under the assessments was in excess of 15 million dollars. Between 4 and 29 October further assessments were issued by the Deputy Commissioner to members of the partnership bringing the total tax under amended assessments in respect of those years up to the year ended 30 June 1990 to over 45 million dollars.

7. On 13 October Mr Richard Scheinberg and Mr George Jacobs, who is said to be a son of Mr Albert Scheinberg, acting in their capacities as directors of Mogul Stud, resolved to appoint Mr Brian Raymond Silvia as receiver and manager of the partnership companies upon becoming mortgagee by virtue of having taken the assignment to Mogul Stud of the securities from the State Bank. They also resolved that Mogul Stud indemnify Mr Silvia in relation to his appointment. On 14 October Mr Dunkel on behalf of the Best and Less Group and Mogul Stud wrote to the solicitors for the State Bank enclosing various executed documents to achieve the assignment and stated that the matter was of extreme urgency and that Mogul Stud was anxious to complete settlement the following afternoon.

8. On 15 October settlement of the purchase by Mogul Stud of the State Bank's debt and securities took place. Mogul Stud paid the State Bank $20,072,032. Mogul Stud obtained the funds by loan from Propend Finance ACT Pty Limited, a wholly owned subsidiary of Propend, which in turn had borrowed $4.5 million from the ANZ Bank. Another source of funds was a loan from Vanuatu Pty Limited, a member of the Scheinberg Group, which in turn had borrowed funds from A. Scheinberg Holdings Pty Limited, J. Hammond Investments Pty Limited and Veradi Pty Limited as trustee for Veradi Investment Trust in certain Scheinberg companies.

9. By letters of 16 October, prepared by Mr Dunkel and signed by Mr Richard Scheinberg on behalf of Mogul Stud and directed to each of the companies which had given security to the State Bank, demand was then made for payment for the sum of some $20,000,000. The demand was not met as the partnership companies were unable to repay the sum of $20,000,000 at that time. Instruments of appointment of Mr Silvia as receiver and manager dated 16 October 1991 were executed by Mogul Stud under the security assigned to it by the State Bank. Mogul Stud is the holder of the first registered charge over all of the assets and undertaking of the relevant members of the Best and Less Group including the business conducted by the partnership.

10. Since 7 November Mr Silvia has endeavoured to sell the mortgaged property by public tender. On 30 November he advertised the sale by tender in various publications and it is apparent from the evidence that it has been extensively and carefully advertised. As a result of the advertisements Mr Silvia received expressions of interest from certain parties including a number of large and well known companies in this country, some of which are well established and large retailers. In addition to advertising, Mr Silvia directly approached (either himself or through staff) various companies and organisations including some well known companies certain of whom are retailers. Certain of those companies got in touch with Mr Silvia and requested that further information to be sent to them about the Best and Less Group. In response, Mr Silvia sent a document called an "Information Memorandum" to them. I will not refer to figures or very much of the detail in that document as certain of it has been treated by the parties and by the Court as confidential for obvious enough reasons.

11. The Information Memorandum provides for the sale of the mortgaged property by lots. Interested parties were given the option to tender for all or a select number of lots. Some lots offered were not property within the administration of Mr Silvia but were offered by other members of the Best and Less Group on the basis that they were intrinsically linked to the mortgaged property or would if offered, be likely to increase the purchase price tendered.

12. The Information Memorandum included a form of tender to be completed by any interested party wishing to formally tender for the mortgaged property and any other lots. I have seen that form of tender. I should say at this stage that, although the Information Memorandum was criticised by the Deputy Commissioner on various grounds including alleged lack of clarity and excessive generality and to a certain degree internal inconsistency, I am not persuaded that these criticisms are correct.

13. Tenders closed on 22 January this year. Mr Silvia has not received any form of tender or any offer to purchase the mortgaged property or any lot from any of the parties to whom I have previously referred as being those who received the memorandum or who may have expressed interest. The only offer which has been received is one from Mr Berel Ginges himself on behalf of an undisclosed nominee to purchase the mortgaged property and other lots offered by tender. I will not, for reasons of commercial sensitivity, discuss at this stage the offer in any depth. At the close of tenders there were four interested parties who expressed an interest in purchasing the lots offered in the Information Memorandum, but they required further time to consider any offer, make further inquiries and decide whether in fact they wished to make a formal offer. Among those parties there is at least one large retailer.

14. On 24 January an employee of Mr Silvia spoke with officers from each of the four interested parties and requested that they lodge with him a letter specifying their continued interest in the purchase of the mortgaged property and provide a timetable for the carrying out of further inquiries by them and the formation of an offer to purchase. Mr Silvia has said that he believes it unlikely that he will receive any firm offer within the next four weeks or so, and, should he receive an offer, he believes it would then be subject to numerous conditions which would require further negotiation, particularly in relation to the lots which have been offered and which have not been under his administration.

15. In October 1991, shortly after being appointed receiver and manager, Mr Silvia commissioned Messrs Coopers and Lybrand, chartered accountants, to conduct a valuation of the mortgaged property. I will say little about the valuation as carried out because it too is obviously highly commercially sensitive at this stage. What I will say about it however is this, that at the end of the valuation exercise Coopers and Lybrand determined fair market values of the relevant assets including the partnership business. They valued the business on the basis of an entire partnership undertaking and, alternatively, on the basis of State regions or lots.

16. The offer from Mr Ginges is a figure substantially lower than the figure fixed by Coopers and Lybrand for the entire partnership business undertaking. Mr Silvia has been informed by executives in the employ of the Best and Less Group that if he is to conduct the business as a going concern it will be necessary to place various orders during February, March, April and May of this year to secure stock for the summer of 1992 and autumn of 1993. The total potential liability over the next four months is some $57 million with potential liabilities of $19 million to be incurred before 1 March this year. Mr Silvia has been conducting the business of the partnership as a going concern and the current trading results are before the Court, but I shall not refer to them.

17. There is evidence that if the tangible assets of the partnership are sold on a break up basis they would realise a figure less, but not in all the circumstances substantially less, than the amount of the offer from Mr Ginges. These figures are of course relative because the values of the assets of the partnership run into many millions of dollars. Mr Silvia has said that he has been placed in a position where, having advertised and approached prospective tenderers without success, at this stage he has received an offer from Mr Ginges and an expression of interest from four potential purchasers who seek further time to consider their position.

18. He says the offer from Mr Ginges is sufficient to discharge the secured creditor (Mogul Stud) and the costs of the receivership together with any liabilities for the performance of further orders. He is not aware of what terms the four interested parties are prepared to make an offer, if indeed they make an offer at all. He therefore asks the Court for directions as to what he should do in the circumstances. The Deputy Commissioner asserts that the application is premature; he claims that the amount of the offer received from Mr Ginges is approximately the same figure as would be reached on the sale of the partnership assets at auction, a figure substantially below the lower of the range of figures found by Coopers and Lybrand to be the true value of the Best and Less business as a going concern.

19. The receiver has obviously worked very hard to achieve the present position whereby the partnership is still trading with most of the staff still employed by him. Mr Ginges' offer stands and no other offers have been received. On the other hand there are expressions of interest from large corporations who contacted the receiver and who may or may not in due course make offers. But in all likelihood if any offer is forthcoming, it will not be for the passage of quite a few weeks. Indeed no further offers may be made at all and Mr Ginges' offer may itself be withdrawn or reduced in amount and the result may be the sale on a break up basis of the assets of the partnership companies.

20. It is also possible that the indemnity currently given by Mogul Stud to the receiver will not continue pending the sale of the partnership business, especially if the sale is made to some person other than Mr Ginges or his nominee. In that event the receiver will be in a difficult position and possibly then be obliged to cease to carry on the partnership business other than for the purpose of selling the assets on a break up basis.

21. At this time the only offerer is Mr Ginges, and the purchase price offered by him in essence equals the amount of the debt due to the secured creditor (Mogul Stud). Mr Ginges and those who appear to control the partnership companies and Mogul Stud are related to each other by blood or marriage. If Mr Ginges or his nominee acquires the partnership assets the result will be that the assets and business of the Best and Less partnership will be transfered to Mr Ginges' nominee free of the present liability to the Deputy Commissioner of Taxation; and the partnership companies will be left as a shell without assets and, though freed of secured liabilities, with the Deputy Commissioner as the unsecured creditor in a very large sum.

22. If the direction sought by the receiver is not given the result may be that in the near future one of the companies independent of the Best and Less Group which has expressed interest may make an offer higher than the price offered by Mr Ginges, but it is possible that no such offer would be forthcoming at all.

23. At worst it would seem that the assets of the Best and Less partnership would be sold on a break up basis and realise figures less, though, as I said earlier, not in all the circumstances substantially less, than the amount of the current offer from Mr Ginges. If no outside offer is received and Mr Ginges withdraws or reduces his offer and assets are sold on a break up basis, the secured creditor Mogul Stud may not be paid in full thus leaving it as an unsecured creditor to the extent of any deficiency to join the ranks of the Deputy Commissioner. That is a risk the Deputy Commissioner is prepared to run because even if Mr Ginges' offer is accepted he stands to gain nothing by way of dividend in a winding up of the Best and Less partnership.

24. I have sympathy for the receiver in his present position, but I am not persuaded that the time has yet arrived for the Court to give the direction sought. At some future date it may be appropriate to give that direction, but that will depend on the circumstances as they unfold hereafter. Accordingly, the Court declines to give the direction sought in the notice of motion of the receiver heard on Friday last, 7 February.

25. As to costs, the application was a proper one for the receiver to make as he sought quite rightly to know if he should or should not accept Mr Ginges' offer at the present time. The receiver is doubtless entitled to his costs and expenses out of the assets charged under the security to Mogul Stud and needs no order of the Court. Although the Deputy Commissioner was a party to the motion and was entitled to appear and oppose it, in my opinion there should be no order as to his costs of the motion, but he should not be ordered to pay any costs of the motion as the receiver acted properly in bringing the motion and the Deputy Commissioner in taking the stance he did.