Refusal to adjourn winding up application, despite tax appeal

Earlier this week, the Federal Court gave judgment in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (no 2) [2013] FCA 208 (link). The case is a handy illustration of the fact that where the Commissioner applies to wind up a company, it may proceed to obtain the order even though a company has lodged an appeal as to the tax liability upon which the statutory demand was founded.

The Commissioner had served a statutory demand in April 2011. The company filed a s 459G application for an order setting it aside. It argued it had a genuine dispute as to the amount or existence of the debt, pursuant to s 459H(1). It had lodged an objection to the Commissioner’s assessment, the objection had been disallowed, and the company had taken steps to challenge the objection decision in the Administrative Appeals Tribunal. On that occasion, Barrett J in a pithy and emphatic 8 paragraphs, dismissed that proceeding in September 2011 – see In the matter of Bayconnection Property Developments Pty Ltd [2011] NSWSC 1048.

Then in November 2011 the Commissioner filed an application under s 459P to winding up the company on the ground of insolvency. This was first heard in April 2012. It was common ground that the Court was required to presume that the company was insolvent, pursuant to s 459C(2)(a), as it had not complied with the Commissioner’s statutory demand.

On that occasion (link), Robertson J adjourned the Commissioner’s winding up application, pending the outcome of the defendant company’s challenge to the Commissioner’s assessment of its tax liability. It had issued proceedings under s 14ZZM of Pt IVC of the Taxation Administration Act 1953 (Cth), in the Administrative Appeals Tribunal. The Commissioner conceded, as he had in Broadbeach at [13], that:

“Notwithstanding the presumption of insolvency that would apply under s 459C(2)(a)…upon the hearing of such winding up applications the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in proceedings under Pt IVC of the Administration Act, if those proceedings then still be on foot…”.

Robertson J accepted that the company had a “reasonably arguable” case in those proceedings. The company submitted, and it was accepted, that it was insolvent only by reason of the alleged tax debt – it had no other third party creditors. It was no longer trading and had not been for some years. On that occasion, Robertson J exercised his discretion in s 459A of the Act (“On an application under s 459P, the Court may order that an insolvent company be wound up in insolvency.” ) and adjourned the winding up application. His Honour also made an order under s 459R(2) extending the period within which the wind up application must be determined (the specified period being within 6 months of the application being made).

The Tribunal then heard the tax matter over five days in August 2012 and reserved its decision. The Tribunal handed down its decision on 29 January 2013. The company (and its related defendant companies) lodged a notice of appeal to the Federal Court within time, and the tax appeal was listed for first directions on 14 March 2013. (Robertson J was hearing this winding up application on 8 March 2013.)

Before Robertson J, the defendant companies again contended that there was and would be no debt to the Commonwealth by virtue of their tax appeals. While the Court was required to presume they were each insolvent, pursuant to s 459C(2)(a) of the Act, each company was insolvent only by reason of the tax debt in question.

Robertson J turned to the fresh exercise of his discretion, on this occasion, under s 459A. His Honour took into account the general principles set out in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10 at [77], bearing in mind that that was a case about whether or not execution of a judgment debt should be stayed and a case where there had been no hearing on the merits, the appeal under Pt IVC of the Taxation Administration Act not having been hard.

His Honour identified the following factors which he took into account at [15], in refusing the adjournment application on this occasion –

  • It is the taxpayer which bears the onus of persuading the Court that a stay ought be granted in the particular circumstances
  • That great weight must be given to the clear legislative policy which gives priority to the recovery of taxation revenue notwithstanding that the taxpayer has a Pt IVC proceeding on foot
  • That it is too narrow a view of the discretion to grant a stay merely because Pt IVC proceedings are pending or because on review of those proceedings there appears to be an arguable case
  • That in cases where the Court considers that it is in a position to assess the merits of pending Pt IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits but the taxpayer needs to have more than merely an arguable case
  • That irrespective of the merits of pending Pt IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax
  • That more weight would be given to the merits factor if the case is one where the Deputy Commissioner has abused his position.

Robertson J found it significant that the tax appeal from the AAT to the Federal Court was on, and limited to, questions of law. Whereas he had held in April 2012 that each company had an arguable case which extended to the facts, the position now was that each defendant company was limited to questions of law. His Honour considered the grounds, and found that they were not reasonably arguable (at [26]). His Honour found that even if he was wrong on that and the grounds of the tax appeal were reasonably arguable, they were not strong, and the clear legislative policy which gives priority to the recovery of taxation revenue, would outweigh any merits of the appeal to this Court. Perhaps even the highly esteemed tome, Fary on Adjournments, would not have aided the defendant companies in staving off the result, in this case.

His Honour ordered that the companies be wound up.

For those interested, I refer you to my case review last month of HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45, a most interesting case involving the dismissal of an application by a company to set aside a statutory demand issued by the Commissioner (link).

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