Category Archives: Corporations Law

Update – ATO’s statement on unfair preference case and reallocation of payments

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Last year I reviewed the Federal Court’s decision and the Full Federal Court’s decision on appeal in a third party preference case against the Commissioner of Taxation, which had an interesting twist. My review of the first instance decision of Nicholas J of March 2012 in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152 is here. My review of the appeal decision of September 2012, Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124, is here.

The interesting issue in this case was the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (in this case, the integrated client account) to another (in this case, to the superannuation guarantee or “SGER” account), and whether that enables the Commissioner thereby to avoid the reach of the unfair preference provisions.

An argument the Commissioner advanced unsuccessfully both at first instance and on appeal, was that the fact that the payments were (re)allocated to the SGER account in respect of the company’s superannuation guarantee charge liability, meant that there was no unfair preference. A payment of an SGC liability is a priority payment under s 556 of the Corporations Act, so the argument went, and therefore there was no unfair preference to the Commissioner, as he would have received the same priority over other creditors in any event.

In this case, the Full Federal Court went further on this issue than Nicholas J had done. The Full Federal Court noted that the evidence showed that on 31 July 2007, an ATO employee had telephoned the NSW Supreme Court to ascertain the date of the hearing of the application to wind up the relevant company, and was told it was set for 23 August 2007. The next day, 1 August, the relevant payments were “reallocated” by the ATO.

The Full Federal Court made a specific finding (at [90]) that it was plain the Commissioner took the step of reversing and (re)allocating the payments from the integrated client account to the SGER account –

“with a view to obtaining a priority over other unsecured creditors in the event that [the petitioning creditor] obtained a winding up order when the matter was due to come before the Supreme Court.”

Their Honours observed at [91] that –

“It is a fundamental principle of the law of unfair preferences that the present statutory regime, and its predecessors are…intended to render void any transaction which, if allowed to stand, would dislocate the statutory order of priorities among creditors.”

Yet, so their Honours specifically held –

“…that is precisely what the Commissioner intended to achieve.”

Extraordinary. The Full Court observed that it was implicit in the Liquidator’s submissions that on the proper construction of s 8AAZD of the Taxation Administration Act 1953 (Cth), the power of allocation does not extend to a power of reallocation to another ATO account. Thus the Commissioner had no power to so reallocate (at [70]). The Full Court took the view that it did not need to determine this question (at [88]). I discuss this issue in greater depth in my review of the decision (here).

The Commissioner’s response? It escaped my notice at the time, but on 23 November 2012, the Commissioner published a Decision Impact Statement on the case (link). In it the Commissioner notes that he did not apply to the High Court for special leave to appeal the decision.

On this issue here discussed, the Commissioner points to the fact that it was not necessary for the Full Federal Court to make a decision about the Commissioner’s powers to allocate or reallocate payments. The Commissioner then states –

“This decision does not affect the Commissioner’s powers to allocate payments received by taxpayers in accordance with the two methods set out in Division 3 of Part IIB of the Taxation Administration Act 1953.”

It would appear that despite the findings of the Full Federal Court as to the ATO’s conduct, the Commissioner has no intention of taking steps to change the internal practices of the ATO as to reallocations made between the accounts of failing companies. Troubling. Particularly so, one might think, now that directors can be made personally liable for the unpaid and unreported superannuation guarantee charge liabilities of their companies (since 30 June 2012). What is to stop the ATO from unilaterally reallocating payments in the reverse direction, depending upon which way it considers it may best maximise the revenue to be recovered?

Newflash: The Banks win special leave to appeal Bell Group to the High Court

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It is being reported that this morning, Westpac and the other 19 banks in the Bell Group litigation have won special leave to appeal their loss last year in the West Australian courts to the High Court of Australia.

At first instance in 2008 the Banks were ordered by his Honour Justice Owen to pay about $1.58 billion to the liquidators of Bell Group (link). Their appeal of that decision to the Court of Appeal of the West Australian Supreme Court failed – see that judgment here. This morning, the full bench of the High Court granted the Banks special leave to appeal.

The brief media report may be read here. And thus Australia’s reportedly most expensive and longest-running court case continues…

Refusal to adjourn winding up application, despite tax appeal

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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).

ASIC Information Sheet 165 – Legal Professional Privilege and Responding to Compulsory Production Notices

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Late last year (13 December 2012) ASIC released its Information Sheet 165 outlining the approach it takes to claims of legal professional privilege (LPP). ASIC has compulsory information gathering powers to require disclosure of information. This power may be exercised in respect of their regulatory work. As ASIC stated in its press release, documents and information that attract a valid claim of LPP does not have to be provided. However, when the recipient of a notice compelling production of documents makes a claim of LPP, issues can arise as to whether the claim has been properly established, and whether LPP information can be provided to ASIC on a limited and confidential basis.

In Section 6 of the information sheet, ASIC states in summary that if in ASIC’s opinion a claim of LPP is not substantiated by the information provided, or in their view it is otherwise not valid (by reason of waiver or because it is simply not privileged, in their view) then you, the party claiming LPP in a document, have several choices. You may (a) withdraw your claim of LPP and provide the information to ASIC, (b) enter into a voluntary LPP dispute resolution process with ASIC, or (c) make an application to Court to seek a declaration that the information is privileged.There is also a fourth choice: (d) maintain your claim of LPP but provide the documents voluntarily on a strictly confidential basis.

Earlier in ASIC’s Information Sheet, at Section 5, ASIC outlines the procedure they refer to as “Voluntary confidential disclosure of LPP information”. Under this approach, ASIC may accept, on a confidential basis, privileged information voluntary provided by a notice recipient. Broadly, ASIC and the privilege holder agree that the disclosure of the information is on a strictly confidential basis, and ASIC and the privilege holder agree that the disclosure is not a waiver of any privilege existing at the time of the disclosure. ASIC notes that this prevents ASIC from later asserting that the provision of the information to it amounts to waiver, but may not prevent third parties from asserting that privilege has been waived thereby.

In this regard, I note that in the Centro privilege decision I reviewed last year, PwC sought to argue that Centro had waived privilege by their provision of documents to ASIC by virtue of notices issued under s 30 of the ASIC Act 2001 (Cth) requiring their compulsory production. Centro had provided some unredacted documents to ASIC under covering letters expressing their provision to be on a confidential basis, with an express reservation of privilege and an express lack of intention to waive privilege. Bromberg J held that while there might have been a limited waiver by Centro as against ASIC, there was not necessarily waiver as against a third party like PwC. His Honour referred to the High Court’s decision in Mann v Carnell [1999] HCA 66; 201 CLR 1 at [32]. See Kirby v Centro Properties Limited (No 2)[2012] FCA 70 and my post of February 2012 entitled “Centro class action developments – (a) privilege and (b) a bombshell”. (The privilege section of this post was later republished in extended form, and may be viewed here.)

It is useful to consider the judgment by Bromberg J in Kirby v Centro on this issue of the “voluntary” provision of privileged documents to ASIC in response to a notice from ASIC compelling production, in particular the passages at [97]-[108].

In relation to waiver, the judgment provides some comfort, in that it demonstrates that documents provided under compulsion to ASIC for a limited purpose, may retain the protection of privilege as against other third parties (cf AWB Ltd v ASIC [2008] FCA 1877 at [26]). However caution is warranted. Much will depend upon the circumstances of their provision, and the extent to which a company can claim that its provision of the documents was consistent with the maintenance of confidentiality in those documents as against third parties.

ASIC’s letters accompanying the s 30 notices requiring production of documents in Kirby v Centro stated that ASIC understood a valid claim of legal professional privilege was a reasonable excuse for not producing documents pursuant to the s 30 notice and that accordingly, Centro was not obliged to produce documents which were covered by a valid claim to privilege. However, so ASIC’s letters said, if a claim for legal professional privilege was made, detailed information in support of that claim was required by ASIC in order that ASIC could assess whether the claim was justified.

In response Centro provided documents, some unredacted, including those to which it later claimed privilege in these proceedings as against PwC. Centro’s solicitors went to some length in their covering letters accompanying the documents (see paragraph [99]). It is instructive to have regard to some of the statements their letters included, bearing in mind the successful result they obtained here on the question of privilege –

  • That Centro did not intend to waive legal professional privilege by providing documents to ASIC to which Centro may be entitled to claim legal professional privilege,
  • That in the event that Centro ascertained that a document or part of a document was one over which it was entitled to assert a claim for legal professional privilege, Centro reserved the right to seek to assert legal professional privilege over that document,
  • As to confidentiality, that the documents provided to ASIC were confidential and that they were being provided on the basis that ASIC would treat the documents as confidential and not provide them, or disclose the information contained within them to any other person except under legal compulsion or with Centro’s prior written consent.

(I note that on 28 February 2012 PwC sought leave to appeal the judgment of Bromberg J, but leave was refused by North J (link).)

Statutory demands from the Tax Office – HC Legal Pty Ltd v DCOT [2013] FCA 45

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On Tuesday the Federal Court dismissed an application by a company trading as a law firm to set aside a statutory demand issued by the ATO. It is an interesting case and the judgment provides a useful reminder that even though a company may have challenged a tax assessment and an objection or appeal proceedings are pending, this is no bar to the Commissioner issuing a statutory demand, and does not of itself provide grounds to have one set aside. The judgment of Murphy J is that in HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45.

In applications to set aside a statutory demand, the ATO is in a privileged position compared with anyone else. This is because even where the taxpayer disputes the tax debt, the ATO  has the benefit of several legislative provisions which have the effect of deeming notices of assessment and declarations as conclusive evidence that the amounts and particulars are correct and due. The Hight Court has held that the operation of those provisions cannot be sidestepped by an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 (Broadbeach Properties).

Before turning to the substantive part of the case, I will first briefly address two other aspects.

Applications for review of a Federal Court Registrar’s decision

HC Legal Pty Ltd v DCOT was in fact a rehearing de novo of the set-aside application which had first been made to a Registrar and dismissed. The plaintiff (HCL) had then made application for a review of the Registrar’s decision pursuant to s 35A(5) of the Federal Court Act 1976 (Cth). His Honour said the following in relation to the nature of applications for review of a Federal Court Registrar’s decision, at [4] –

“It is uncontroversial that the application involves a rehearing de novo, at which the parties may adduce further evidence. The Court is to exercise its discretion afresh, unfettered by the decision of the Registrar: Martin v Commonwealth Bank of Australia [2001] FCA 87; (2001) 217 ALR 634 at [6] and [12]; Mazukov v University of Tasmania [2004] FCAFC 159 at [22]-[27]; Callegher v ASIC [2007] FCA 482; (2007) 239 ALR 749 at [46].”

Background – The contractual arrangement

This case involved a rather curious contractual arrangement, which lead directly to the tax liability and statutory demand that followed. The law firm in question Hambros and Cahill Lawyers (HCL) was a small one, with two lawyers as its directors. In December 2011, HCL entered into an agreement with an entity related to the winemaker Andrew Garrett (Holy Grail). Under the agreement, for a fee, Holy Grail granted HCL the exclusive rights to provide legal services to Mr Garrett’s associated entities. Not only might it be thought unusual for a law firm to purchase the rights to represent clients, but the size of the fee HCL agreed to pay for this right was staggering: $45m plus GST – a total of $49.5m. HCL was to pay this fee pursuant to a vendor finance agreement, the vendor being Holy Grail and the borrower being HCL. The effect of this was that HCL did not need to advance any funds at the time.

In early 2012, when HCL came to lodge its BAS for that last quarter in 2011, it stated it had made a capital purchase in the sum of $49.5m in the last quarter of 2011, and claimed input tax credits from the Commissioner in the sum of $4.5m for the GST paid on that purchase. After deductions for GST amounts it owed, the input tax credits it claimed came to $4,491,954, which the Commissioner then remitted to HCL. There was no evidence as to what then happened to that money in the hands of HCL, but HCL’s counsel informed the Court that it had been used to pay certain expenses of the firm, pay a deposit to purchase Seabrook Chambers in Melbourne, and the balance of $2m each was distributed to the two directors, posted in the books as a loan, although each director had paid back $350,000 to HCL.

As Murphy J put it: “The Commissioner’s concern regarding the transaction and the claim for input credits of $4.491 was immediately apparent.” Shortly thereafter the Commissioner froze HCL’s bank accounts and moved to audit the firm.

In May 2011, following the audit, the Commissioner assessed HCL as liable to pay $4.5m in GST. However, although the ATO’s Running Balance Account (RBA) statement for the company showed that GST liability as relating to the last quarter of 2011, the notice of assessment referred to the first quarter of 2012. Under a separate notice, with the correct tax period cited, there was also a penalty imposed of $2.5m.

On 19 June 2012 HCL lodged its objection to the assessment and penalty.

On 4 July 2012 the Commissioner served the statutory demand, seeking payment of $6.95m – $4.5m in GST, $2.25 penalty and interest charges.

On 11 September 2012 the Commissioner sent a letter enclosing a new, revised assessment to HCL, asserting the first notice had contained a typographical error and that the correct tax period was the last quarter of 2011. This was followed by an email from the Commissioner’s office referring to the error in the first assessment.

The Statutory Demand – Was there a “genuine dispute” such that it should be set aside?

The Court may set aside a statutory demand on the basis that there is a genuine dispute about the existence or amount of the debt to which the demand relates: s 459H(1)(a) and (3) of the Corporations Act 2001 (Cth) (the Act).

In the hearing before the Registrar, HCL had not contended that there was a genuine dispute under s 459H because, said Murphy J in his judgment, of the statutory protection afforded to debts arising from tax assessments. In the Broadbeach Properties case referred to above, the High Court said this at [57]-[58] –

“Section 459G applications by taxpayers are not Pt IVC proceedings and production by the Commissioner of the notices of assessment and of the GST declarations conclusively demonstrates that the amounts and particulars in the assessments and declarations are correct ([Taxation] Administration Act, Sch 1, s 105-100 [now s 350-10]; [Income Tax] Assessment Act, s 177(1)). That being so, the operation of the provisions in the taxation laws creating the debts and providing for their recovery by the Commissioner cannot be sidestepped in an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner.

“The matter was explained, with respect, correctly by Williams J in Bluehaven Transport Pty Ltd v Deputy Federal Commissioner of Taxation (2000) 157 FLR 26 at 32. The use by the Commissioner of the statutory demand procedure in aid of a winding up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue. The phrase “may be recovered” in ss 14ZZM and 14ZZR of the Administration Act applies to the statutory demand procedure. That state of affairs places the existence and amounts of the “tax debts” outside the area for a “genuine dispute” for the purposes of s 459H(1) of the Corporations Act.”

To consider that for a moment: In other words, the effect of the legislative provisions cited in the first of these two paragraphs is that when it comes to debt recovery, the ATO’s claims are in a sense “bulletproof” – the notices of assessment and declarations they issue are treated as conclusive evidence that they are correct as to the amount and particulars of the tax liabilities. The effect of the provisions in the second paragraph is that the Commissioner can continue with recovery actions even if a review on objection or an appeal pending, as if no such review or appeal were pending.

While HCL did not run it before the Registrar, before Murphy J, HCL advanced the argument that there was a genuine dispute under s 459H(1). HCL argued that the Commissioner had conceded the first notice of assessment was flawed, pointing to the issue of the second notice, and the ATO correspondence about the error. HCL argued that this negated the first assessment on which the statutory demand was predicated.

His Honour rejected these arguments, on a number of grounds –

  • The Commissioner had not discharged the first assessment made, as evidenced by the RBA statement showing no adjustment;
  • The contentions of HCL were misconceived as they equated an “assessment” with a “notice of assessment”, the former being the official act or operation of the Commissioner, the second being the piece of paper informing of it (see [31]-[32] and the authorities and provisions there cited);
  • The first notice of assessment with its error as to the relevant tax period did not affect the assessment itself. Indeed under s 105-20(1), Schedule 1 of the Taxation Administration Act 1953 (Cth), the assessment would remain valid even if notice of the assessment was not given at all ([33]-[34]);
  • It was clear, including from HCL’s objection and submissions, that HCL was not mislead by the error in the first notice ([35]);
  • In any event, the Commissioner corrected the error by way of the second notice of assessment, which was provided prior to the hearing. The existence of a genuine dispute must be determined at the time the Court hears the application (see [36] and the authorities there cited);
  • The Commissioner also has the benefit of s 8AAZI of the Taxation Administration Act, which provides that the production of an RBA statement is prima facie evidence that the RBA was duly kept and that the amounts and particulars in the statement are correct. The relevant RBA was in evidence before the Court and showed that the amount reflected in the statutory demand was the amount of HCL’s debt to the Commissioner as at the date of the statutory demand (see [37]-[38] and [40]-[41]);
  • Various other legislative provisions have the effect that the amounts set out in the RBA statement were now due and payable by HCL: see subsection 8AAZH(1) of the Taxation Administration Act 1953 (Cth), and s 255-5 and 255-1 of Schedule 1 of that Act (see [39]);
  •  The Commissioner also relied upon the above-mentioned s 350-10 of Schedule 1 of the Taxation Administration Act, which provides that the production of a notice of assessment is conclusive evidence that the assessment was properly made, and the amounts and particulars of the assessment are correct. His Honour was not persuaded that in the circumstances of this case that provision operated as the Commissioner contended, with regards to the first notice of assessment. However in light of his conclusions above, it was unnecessary to decide this question (see [41]).

The Court found that HCL’s contentions raised a spurious rather than bona fide or real ground of dispute. His Honour did not accept that the error in the first notice of assessment gave rise to a genuine dispute under s 459H of the Act as to the existence or amount of the debt to which the statutory demand related. The assessment itself was unchanged. (See [42] and the authority there cited.)

Whether the Statutory Demand should be set aside for some other reason

HCL also argued that the statutory demand should be set aside as there was “some other reason” which would justify the Court’s exercise of its discretion to do so pursuant to s 459J(1)(b) of the Act. HCL based this upon the Commissioner’s conduct, upon the fact that HCL had disputed the assessment by lodging an objection, and upon the contention that it had a reasonably arguable case on its objection.

In Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 19 ACSR 125 at 139, the Full Federal Court observed that the discretion might be exercised where it is “shown that the Commissioner’s conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice.”

Later judgments have indicated that the discretion is of broad compass, and Murphy J expressed the view that he did not consider the Court in Hoare Bros was seeking to exhaustively set out the situations it comprehends (although I suggest it provides a useful guide). HCL argued, and his Honour accepted, that it was not necessary to show that substantial injustice would be caused if the discretion were not exercised, although he qualified that, noting that in Broadbeach the High Court had overturned one of the decisions HCL relied upon in this submission. In other words, it indeed might be necessary to demonstrate substantial injustice would follow were the statutory demand allowed to stand.

HCL argued that the existence of proceedings disputing a tax assessment may be relevant to the exercise of the discretion, and pointed to a line of authority in support of that view (see [46]). However, as his Honour noted –

  • Section 14ZZM of the Taxation Administration Act provides –“The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.”
  • Section 14ZZR provides – “The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending.”
  • In 2008 in Broadbeach, subsequent to the authorities HCL relied upon, the High Court observed at [60]-[61] that – “[T]he hypothesis in the present appeals must be…that there is no “genuine dispute” within the meaning of s 459H(1). Both the primary judge and the Court of Appeal emphasised the importance of the disruption to taxpayers, their other creditors and contributories that would ensure from a winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the Commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the Commissioner upon the statutory demand system….The “material considerations”…which are to be taken into account, on an application to set aside a statutory demand, when determining the existence of the necessary satisfaction for para (b) of s 459J(1) must include the legislative policy, manifested in ss 14ZZM and 14ZZR of the Administration Act, respecting the recovery of tax debts notwithstanding the pendency of Pt IVC proceedings.” 
  • His Honour considered that the legislative policy in ss 14ZZM and 14ZZR is that tax assessments are to be paid, even though a review or appeal is on foot;
  • His Honour also pointed to the judgment of Olney J in Kalis Nominees Pty Ltd v Deputy Commissioner of Taxation 91995) 31 ATR 188 at 193 where Olney J – with a note of regret at the end – said: “…The policy of the law would be defeated if a demand were set aside under s 459J(1)(b) simply because a review of an objection decision is pending. A taxpayer must, in the context of a case of this nature, demonstrate more than the fact that he disputes his liability for the tax as assessed and that he is actively pursuing his remedies. It is both unnecessary and undesirable to endeavour to list the circumstances which would justify the exercise of the discretion under s 459J(1)(b) except to say that in the case in which the Commissioner is not shown to have acted oppressively or to have treated the applicant in a manner different from other taxpayers in a similar position, it is not appropriate that the discretion to set aside the demand should be exercised. Section 459J(1)(b) does not provide an occasion for the Court to express its views on the reasonableness or otherwise of the taxation legislation.” 

In response, HCL pointed to the concession the Commissioner had made in Broadbeach that upon the hearing of a winding up application, the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in pending proceedings in which it was objecting to the tax assessment. HCL argued that there was no reason why the existence of a “reasonably arguable” case cannot be taken into account at the statutory demand stage, rather than at the winding up stage as suggested by their Honours in Broadbeach.

His Honour rejected this also. In Broadbeach at [62] the Hight Court had said –

“…Such consideration [of the time which has elapsed and the progression of the Part IVC proceedings towards determination], if it were supported by evidence of the state of progression of the Pt IVC proceedings, would be relevant in the operation of Pt 5.4 of the Corporations Act, if at all, at the later stage of the hearing of any winding up application.” 

In any event, Murphy J could not be satisfied on the evidence before him that HCL had a reasonably arguable case, and HCL did not seek to develop its submissions beyond a mere assertion that its acquisition of the right to provide legal services was a “creditable acquisition” within the meaning of the GST Act, and that it was therefore entitled to the input tax credit of $4.5m claimed.

In relation to conduct of the Commissioner which it argued justified the Court exercising its discretion under s 459J(1)(b) to set aside the statutory demand for “some other reason”, HCL pointed to –

  • the Commissioner’s freezing of HCL’s accounts – which lasted for 1 day,
  • an alleged breach of undertaking to defer recovery proceedings – his Honour found that the agreement was only for the Commissioner to defer them until after an extension for HCL to lodge its objection had expired, which the Commissioner did,
  • a refusal to agree to defer recovery until after the determination of HCL’s objection and any appeals – the Commissioner refused to do so unless HCL was prepared to provide acceptable security for the debt, which HCL declined to provide,
  • the garnishee notice the Commissioner issued and directed to HCL’s bank – which resulted in recovery of a small amount and which was rescinded after a short time, and
  • HCL’s suspicion that the assessments were tainted by bad faith. It had made several FOI requests for the Commissioner’s documents relating to the freezing of accounts and the audit, and had received documents in response – his Honour found none of the documents he was taken to evidenced any bad faith on the part of the Commissioner.

His Honour held that in all the circumstances of the case he did not consider the Commissioner’s actions, considered individually or collectively, were unconscionable, oppressive, abusive, or productive of substantial injustice. There was nothing to justify the exercise of his discretion.

His Honour noted, perhaps wryly, that 11 months later, HCL and its directors still had the benefit of the almost $4.5m remitted to it by the Commissioner. He dismissed the application to set aside the statutory demand and awarded costs of the application, and of the hearing before the Registrar, against HCL.

I will endeavour to monitor the Federal Court portal to see if the judgment is appealed, and if so will post an update to that effect.

**Update 26 June 2013:  The decision was not appealed, and the company is now in liquidation.

Newsflash: Great Southern Class Actions to start tomorrow (Monday 29 Oct)

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One of the largest set of group proceedings yet commenced in the Supreme Court of Victoria is set to start tomorrow (Monday 29 October 2012). The trial will be heard by his Honour Justice Croft and at this stage is estimated to run for 4-5 months. Interestingly, the Supreme Court is providing a live streaming facility on its website, for the viewing of the opening addresses. The webcast portal may be found here.

The Great Southern class actions comprise in excess of 22,000 group members and individual plaintiffs. According to the Supreme Court website, there are 16 group proceedings and 12 individual proceedings which were commenced in the Supreme Court with respect to various agribusiness projects (managed investment schemes) undertaken by Great Southern on behalf of investors. The various agribusiness projects included forestry, horticulture, viticulture and cattle schemes. There are also a large number of County Court proceedings which were uplifted to the Supreme Court (though a large number of these were stayed pending the outcome of the trial).

In broad terms, the Great Southern class actions involve various claims against the Great Southern entities and their directors, including whether certain product disclosure statements for the various agribusiness projects complied with the Corporations Act 2001 (Cth), and whether the Great Southern entities breached their statutory duties as responsible entities variously of the managed investment schemes. There are also allegations of misleading and deceptive conduct.

Each of the 16 separate group proceedings, brought pursuant to Part IVA of the Supreme Court Act 1986 (Vic) relates to a distinct product disclosure statement issued in respect of one or more Great Southern managed investment schemes. The plaintiffs were investors in these schemes.

In the months leading up to the commencement of trial, there have been a multitude of pre-trial issues to be addressed, and disputes to be resolved. One of these has been a contest between the parties as to whether a claim for privilege could be maintained by Great Southern Managers Australia Limited (GSMAL) in a board paper that contained some legal advice. The plaintiffs/investors wanted to tender the so-called “2005 Board Paper” at trial. The issue was whether or not  s 124 of the Evidence Act 2008 (Vic) permitted them to do so.

Last month, on 5 September 2012, the Court of Appeal handed down its judgment on the issue. Aside from a minor point as to the breadth of the declaration to be made, their Honours agreed with his Honour Sifris J, who had held at first instance that  s 124 of the Act permitted the plaintiffs/investors to tender the document.

Various arguments were advanced, but in essence, the issue turned on the proper construction and operation of s 124 of the Act; the section governing the loss of client legal privilege where the privilege is that of joint clients. Section 124 provides as follows –

“124. Loss of client legal privilege – joint clients

(1) This section only applies to a civil proceeding in connection with which 2 or more parties have, before the commencement of the proceeding, jointly retained a lawyer in relation to the same matter.

(2) This Division does not prevent one of those parties from adducing evidence of – 

(a) a communication made by any one of them to the lawyer; or

(b) the contents of a confidential document prepared by or at the direction or request of any one of them – 

in connection with that matter.”

The legal advice said to be contained in the June 2005 Board Paper consisted of emails which contained legal advice provided to GSMAL as principal client, which had been sought by GSMAL for the benefit also of scheme members (investors).

The Court of Appeal agreed with Sifris J’s conclusion that the requirement of a lawyer having been ‘jointly retained’ in s 124(1) was met in circumstances where the advice as sought for the benefit of the scheme members (investors). The section does not require all of the joint privilege holders to expressly retain the lawyer. It is directed to the substance of the transaction, not the agency through which it is effected. (See [21]-[30]).

For this and other reasons, the Court of Appeal held the plaintiffs/investors entitled to adduce evidence of the 2005 Board Paper at the trial. The judgment may be read in full here.

It will be interesting to see how this proceeding unfolds, including how significant this particular evidence proves to be.

Newflash – Willmott Forests investors mount High Court appeal

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In a much anticipated move, Willmott Forests investors have lodged an application for special leave to appeal to the High Court of Australia, from the Victorian Court of Appeal’s recent decision on a question of disclaimer of leases by a liquidator, according to a report in today’s Australian Financial Review.

My review of the Court of Appeal’s decision – from which the Willmott Forests investors seek to appeal – is here. My reviews of earlier Willmott Forests decisions are here and here.

The Australian Financial Review article is here, and credit must go to my friend and colleague Sam Hopper for noting this development; his post is here.

Little is yet known publicly of the detail of the special leave application. I will monitor developments and seek to keep readers informed. In the meantime, I note that the website of one of the two investor groups involved in the litigation – Willmott Action Group Inc – appears to have been dismantled. It is unclear as to what, if anything, this signifies.

Application for approval of funding agreement by Liquidators – s 477(2B) – Confidentiality and Privilege – Great Southern

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On Thursday the Federal Court in Perth handed down its decision on an ex parte application by the Liquidators of the Great Southern companies (Great Southern Limited, Great Southern Managers Limited and Great Southern Finance Pty Ltd) for approval under s 477(2B) of the Corporations Act 2001 (Cth) (the Act) to enter into a funding agreement with Riverrock Capital Limited (Riverrock) and into an agreement as to the retaining of a specific firm of solicitors (Lipman Karas Lawyers). The case is Jones, Saker, Weaver and Stewart (Liquidators), In the matter of Great Southern Limited (in liq)(Receivers and Managers Appointed) [2012] FCA 1072. The judgment of Gilmour J may be read in full here.

The judgment is not long, and provides a neat illustration of a s 477(2B) application. These are commonly – but not exclusively – made in the context of funding agreements. (Settlement agreements incorporating long-tail obligations or instalment payment arrangement spreading over longer than 3 months, also commonly give rise to such applications.) This judgment serves as a useful reminder of the legal principles relevant on such applications, and the key factors relevant to the exercise of the Court’s discretion as to whether or not to grant approval. It also serves as a timely reminder for practitioners to ensure that their affidavit material is sufficient to properly address as many of the key factors as are relevant to a particular case. Here, the Liquidators had brought an earlier application seeking the same approval for the same funding agreement, which was refused due to the inadequacy of coverage of some of the material placed before the Court on that occasion (see [1]-[6]).

Section 477(2B) of the Act provides –

“Except with the approval of the Court, of the committee of inspection or of the resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

(a)  without limiting paragraph (b), the term of the agreement may end; or

(b)  obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.”

In this case, the evidence before the Court identified investigations that the Liquidators had identified as worth pursuing and, subject to the outcome of those investigations, had identified claims worth pursuing, upon which counsel’s advice had been obtained. The Liquidators lacked the funds required to pursue those investigations, and hence had sought funding. They proposed to enter into a funding agreement with Riverrock which they also placed before the Court. As the Liquidators’ investigations and any consequential proceedings were unlikely to be resolved within 3 months of execution of the funding agreement, s 477(2B) approval was required.

Three points of interest to note –

1. Approval was sought prior to entry into the agreement

As it ought to be. Note the prohibitive terms of s 477(2B). However, if an agreement is entered into prior to the seeking of leave, all may not be lost. Leave can be sought – and may be granted, subject to the Court’s view on the proper exercise of its discretion in a particular case – nunc pro tunc. For a good example of this, see a case I was involved in last year – the judgment of Gordon J on an application by the Liquidators of the Westpoint Mezzanine Companies in Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq) [2011] FCA 1028. Note that where leave is sought nunc pro tunc, the orders granting retrospective leave are framed in a particular way, although the practice varies somewhat from judge to judge.

2. Issues of Confidentiality and Waiver of Legal Professional Privilege in Opinions Placed Before the Court

In this case, the application was made ex parte. There was no contradictor. Only the members of the committees of inspection and the secured creditors who had executed confidentiality agreements were put on notice that this application was to be made.

As is usual – but is not a given – confidentiality orders were made here, pursuant to s 50(1) of the Federal Court of Australia Act (1976) (Cth). These included as to the placing of the affidavits, submissions and transcript in a sealed Court envelope bearing an inscription as to confidentiality. If satisfied that it ought to do so, the Courts make these orders in the public interest in the due administration of justice concerning insolvent companies. Indeed while this is not always the case,here an order was sought – and granted – that the application be heard in camera.

For the Court’s discussion of the relevant principles and factors bearing upon the making of confidentiality orders in this case, see [8]-[22]. On the general issue of confidentiality, in the context of applications for approval of compromise agreements, I also refer you to the judgment of Lindgren J in Elderslie Finance Corporation Limited v Newpage Pty Ltd (No 6) [2007] FCA 1030; (2007) 160 FCR 423 at [43].

Confidentiality – specifically whether confidentiality will later be maintained in the face of challenge and applications for access to the material – is often a concern on these applications. This is particularly so with regards to the placing of counsel’s opinions or other legal opinions before the Court. On the one hand, in broad terms evidence must be placed before the Court to demonstrate why a long term contract (at least, longer than 3 months) is warranted in a particular case, and why on balance it is in the creditors’ interests. On the other hand, this means disclosing, in detail, information that may be either commercially sensitive or sensitive with regards to potential litigation the Liquidators may embark upon. This includes information going to, and the foundation for, the Liquidator’s good faith opinion about the merits of prospective litigation. Typically, the material placed before the Court includes the advice of counsel upon which the Liquidator’s opinion as to merit is based; indeed, the application may be unlikely to succeed without it.

These concerns were heightened by three decisions handed down in 2010-2011, two of them arising as part of the One.Tel litigation. They called into question the extent to which privilege in such legal opinions may be maintained once they are used in an application before the Court. Those decisions were: Australian Power Steering Pty Ltd v Exego Pty Ltd [2010] VSC 497, Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288 and Weston v Publishing and Broadcasting Ltd [2011] NSWSC 14. I will not delve into those decisions in detail here, but I refer you to Gordon J’s judgment in York Street Mezzanine referred to above, in the passages addressing these matters at [40]-[49].

I recommend practitioners take particular note of her Honour’s discussion of the leading authority of Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar; the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160; (2006) 66 NSWLR 112. Especially in a case where this may be a particular concern, I commend you to have regard to the circumstances which bring a case squarely within the ambit of Macedonian Orthodox, and so best protect the Liquidators’ privilege in the legal opinion from later challenge and argument that the privilege has been waived by its use in the application for approval. Gordon J in York Street Mezzanine at [48] identifies those circumstances as being –

  1. the opinion is not provided to the Court by adduction of evidence: see Macedonian Orthodox at [44]-[45]; and
  2. the opinion is provided to the Court only after the Court has indicated that doing so is necessary before it can be in a proper position to give the judicial advice or directions sought: see Macedonian Orthodox at [51].

3. The Principles and Factors Relevant to the Court’s Discretion as to Whether to Approve the Agreement

The Principles

In this case Gilmour J identifies three relevant principles at [29], those being –

1. The role of the Court is to grant or deny approval to the Liquidator’s proposal: Re The Bell Group Ltd (in liq) [2009] WASC 235 at [57];

2. The task of the Court is not to reconsider all of the issues which have been weighed up by the Liquidators or to second guess the Liquidators’ judgment. Thus the Court’s role is not to determine if the Liquidators’ proposal is the best available option, to develop some alternative proposal which might seem preferable or to substitute its own views for those of the Liquidators: Re The Bell Group Ltd (in liq) at [57]; Re Addstone Pty Ltd (In Liquidation) (1998) 83 FCR 583 at 593-594; and

3. Rather, the Court must review the Liquidators’ proposal to “be satisfied that the liquidator is acting in good faith in the making of the commercial judgment in respect of which the Court is being asked to make an order”: Re Addstone Pty Ltd (In Liquidation) at 594. The Court’s approval of the proposal is thus not an endorsement of the proposed agreement. It is merely a permission to the Liquidators to exercise their own commercial judgment in the matter.

His Honour also observed at [30] that if the Court is satisfied that in entering into the Funding Agreement, the Liquidators have acted in good faith and for proper purposes the Court will give the Liquidators considerable latitude in exercising their commercial judgment: Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (Bendeich as liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [16] and Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280; see also Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86 per Giles J.

I refer you also to the six principles distilled by Gordon J in Re Stewart; Newtronics Pty Ltd [2007] FCA 1375 and reproduced by her Honour last year in York Street Mezzanine at [26].

The Factors

At [31]-[32] his Honour observed that in reviewing a Liquidator’s proposal to enter into a funding agreement the authorities have identified a non-exhaustive list of factors relevant to the exercise of the Court’s discretion. Not all of these factors will be relevant in all cases. None are determinative. These factors include –

  1. The nature and complexity of the matter and the risks involved in pursuing a claim or claims;
  2. The prospects of success of the proposed action;
  3. The amount of costs likely to be incurred in the conduct of the action and the extent to which the funder is to contribute to those costs;
  4. The extent to which the funder will contribute towards the opponent’s costs in the event that the action is not successful or towards any order for security for costs;
  5. The circumstances surrounding the making of the contract, including the ability of the funder to meet its obligations;
  6. The level of the funder’s premium;
  7. The extent to which the Liquidators have canvassed other funding options and consulted with the creditors of the company;
  8. The interests of creditors and the effect that the funding agreement may have on creditors of the company;
  9. Possible oppression to another party in the proceedings; and
  10. The extent to which the Liquidators maintain control over the proceedings.

Two remarks to make about those factors. First, you can see as you read through these factors how they shed light upon different ways in which a proposed agreement may be to the advantage or to the disadvantage of creditors. Secondly. in relation to factor 9, this contemplates prejudice of specific types, not the general “oppression” of a party facing the unpleasant prospect of litigation should the agreement be approved. In this regard, see the judgment of Austin J in Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [25] and the passages immediately thereafter.

In preparing affidavit material in support of a s 477(2B) application, and evaluating what to include and as to how much detail to descend, close regard should be had to these principles and factors. This judgment may be found to be instructive on the issue of the adequacy of material on such applications.

More on Willmott Forests (VSCA) & Grimaldi (HCA special leave refusal), plus new edition Mortgagee’s Power of Sale out soon

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First, further to my post on Wednesday discussing the Victorian Court of Appeal’s recent decision on disclaimer of leases by liquidators in Willmott Forests (link), my friend and colleague Sam Hopper has put an excellent analysis of the case on his blog here.

Secondly, I posted last month that the High Court of Australia had denied special leave to appeal to Mr Grimaldi, from the Full Federal Court’s important decision in Grimaldi v Chameleon Mining. That post can be viewed here and includes links to my article and other previous posts about this case. If you recall, key issues of equity and company law arose in the Full Federal Court’s decision, including de facto directors, Barnes v Addy (both limbs), secret commission/bribes, directors’ fiduciary duties and equitable remedies.

I had promised to return and post an update as to the High Court’s refusal of special leave to Mr Grimaldi. In short, the transcript (link) shows that the special leave application centred on the issue of de facto directors and officers, and that special leave was refused on grounds which included –

1. Even if Mr Grimaldi was not a director or officer, on his own case he acted as a third party consultant. Chameleon Mining had good prospects of demonstrating on the findings made that in that role he would have owed fiduciary duties to the company, and that he knowingly participated in a breach of duty by an appointed director (Mr Barnes) of the company. Thus Chameleon Mining had good prospects of demonstrating that the relief ordered by Jacobson J (and undisturbed on appeal) is supportable, even if Mr Grimaldi were not a director or officer. The contemplated appeal would therefore be futile;

2. Even if Mr Grimaldi were not a director, he was an officer. The Full Court’s reasoning is consistent with the more recent High Court decision in Shafron v ASIC [2012] HCA 18; (2012) 86 ALJR 584 (link );

3. Mr Grimaldi had insufficient prospects of demonstrating that the Full Court erred on the director issue. He had alleged that the Full Court failed to consider the governance structure of Chameleon Mining. As Heydon J observed, in fact it did.

Thirdly and finally, the third edition of Mortgagee’s Power of Sale will be released soon, written by Clyde Croft J and Robert Hay. The previous edition was released in 2004, so the updated edition will be an excellent and current resource for practitioners. For more details, see Robert’s post on his property law blog here.

Full Federal Court pronounces on third party preferences and the ATO’s practice of reallocation of payments

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Last Friday the Full Federal Court handed down its much anticipated decision in Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124.  The judgment addresses the interesting and commercially significant issue of third party preferences. It also addresses the even more interesting issue of the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (such as the integrated client account) to another (such as the superannuation guarantee or “SGER” account), and whether that enables the Commissioner thereby to avoid the reach of the unfair preference provisions.

In short, like the judgment at first instance, the result again was a comprehensive loss for the Commissioner. The appeal was dismissed with costs. The joint judgment of Jacobson, Siopis and Murphy JJ may be read in full here. My analysis of Nicholas J’s judgment at first instance in March, with more details of the facts of the case, may be read here.

Background

Briefly, third party preferences are where an insolvent company’s debt is paid by a third party (often a related entity), and the recipient creditor – here, the ATO – defends an unfair preference claim by the liquidator by pointing to the fact that the payment was made not by the company but by a third party, and arguing that the payment is not voidable as an unfair preference as it falls outside the reach of s 588FA (and s 588FC) of the Corporations Act 2001 (Cth) (“the Act”).

In this case, the tax debts of the insolvent company Mortlake Hire Pty Ltd were paid to the Tax Office by a related company Antqip Pty Ltd. This gave rise to the first substantial argument run on appeal. The Commissioner contended that what took place by Antqip paying Mortlake’s tax debts for it, was a substitution of a new creditor of Mortlake’s (Antqip), for the existing creditor (the Commissioner). On this basis, so the Commissioner argued, there was no unfairness, thus there was no “unfair preference” and therefore the payments were not caught by the provisions.

The second substantial issue concerned the purported exercise of power by the Commissioner to allocate payments received from, or on behalf of, Mortlake to an account other than that to which the funds were initially credited. The payments totalling $70,000 had been made by EFT into an ATO account, the integrated client account, for Mortlake’s indebtedness for its primary tax debts which were said to consist of income tax, GST and other related liabilities and exceeded $600,000. Four months later, the ATO had unilaterally reversed the payments made into that account and reallocated the payments to the superannuation guarantee or SGER account. Their Honours described this as a purported exercise by the Commissioner of his power under s 8AAZD of the Taxation Administration Act 1953 (Cth) (“the Administration Act”).

Tellingly, their Honours noted that this reallocation was made shortly before the commencement of the winding up of Mortlake [at 7]. What lead to this action was revealed by a file note dated 31 July 2007 made by an ATO employee. The employee had telephoned the New South Wales Supreme Court to ascertain the hearing date for a winding up application that had been filed against Mortlake. The employee was told the hearing date was set for 23 August 2007 [see 23].

At first instance, his Honour made what the Full Court described as several critical factual findings  [see 25-37] –

1. That although the funds were physically transferred to the integrated client account by Antqip, they were funds lent by Antqip to Mortlake and paid to the ATO at Mortlake’s direction;

2. That the moneys borrowed by Mortlake were applied by it in payment of a pre-existing debt;

3. That the relevant “transaction” for the purposes of s 588FA of the Act was a bipartite transaction between Mortlake and the Commissioner, not a tripartite transaction which included Antqip;*

4. That the “reallocation” by the Commissioner had the effect of increasing the balance recorded in the integrated client account and reducing the indebtedness recorded in the SGER account. The Full Court observed that Nicholas J’s use of the word “reallocate” suggested he was of the view that the funds had been initially allocated to the integrated client account;

5. That the evidence established there was little prospect of the Commissioner receiving any dividend out of the winding up.

* Respectfully, I suggest that the Full Court were wrong in this. They say that this conclusion is “clear from what his Honour said at [36]”. Respectfully, in my view, it is not. His Honour had at [36] expressed that he was “satisfied that Mortlake and the Commissioner were parties to transactions whereby the Commissioner received $70,000 from Mortlake”. Those are conditions which must be met before the preference provisions can apply – see ss 9 and 588FA(1)(a) and (b) , and see the discussion below. What Nicholas J said does not, in my view, suggest there were no other parties to the transactions, which of course Antqip was as the third party which actually made the payments, from its own funds, on Mortlake’s behalf.

First issue – “Substitution”, “transaction” and “unfairness”

“Substitution” and “Transaction”

On appeal, the Commissioner argued that Antqip was substituted as creditor for the Commissioner, as it stepped into the Commissioner’s shoes by paying Mortlake’s debt. Counsel cited no authority for this argument, and it was rejected by the Full Court as contrary to the proper characterisation of the transaction in question (see [38-39]).

The source of the payments was the bank account of Antqip, and this was said to be a clear example of a lender paying moneys advanced to a borrower’s creditor in accordance with the borrower’s directions. The Full Court observed that the position was no different than if Mortlake had borrowed the funds on overdraft from its bank and paid the creditor with those funds (see [63]).

Even if the payments were not properly characterised as a loan from Antqip to Mortlake, the Full Court noted that the payments by Antqip to the ATO were made by or on behalf of Mortlake [42] . Their Honours said that: “the transaction which s 588FA then looks at is the transaction between Mortlake and the Commissioner. That was the approach taken by Gordon J in Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339 [link] where payments were made to a creditor by a related company of the insolvent debtor.”

I pause here to suggest, respectfully, that the brevity with which the Full Court summarised Gordon J’s approach in Burness to what is a “transaction” in this context, coupled with the other matter referred to above, could create problems for Courts – and indeed companies engaging in commercial activity – seeking to apply this judgment. In my view, respectfully, it over-simplifies the analysis that her Honour undertook in Burness and often falls to be undertaken by the Courts in evaluating whether a third party payment of a company’s debt to a creditor can be treated as part of one multi-step dealing that is caught by the definition of a “transaction” in s 9 and 588FA of the Act. And it glosses over the analysis as to whether that transaction can be treated as one by the company, in the sense that (1) the company must be a party to the transaction (ss 9 and 588FA(1)(a); (2) the unfair preference must be “given by the company” under s 588FC; and (3) the creditor must have received more “from the company” than it would if it had to prove for its debt in the winding up (s 588FA(1)(b)) . (There are many cases, but the principal authority is Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; see also Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 245 ALR 528 (link))

In Burness, Gordon J’s analysis on this focussed primarily on the question of whether before a payment made by a third party of a failing company’s debt can be taken to be a payment “accepted” or “made” by the debtor company, there must be evidence of an arrangement between the debtor and third party whereby  the debtor directed or authorised the third party to make the payment, or the third party was under an obligation to the debtor to do so. Her Honour’s view was that the evidence did not need to go so high; “where the third party payment is authorised by the debtor, nothing more is required. The debt is discharged by the third party at the request of or with the acceptance of the debtor” (see [45-46] and indeed [34-47] of Burness). The reason the problem arises is that if the third party payment is unauthorised by the debtor, in law the debt is not necessarily discharged (although it may be subsequently ratified or accepted by the debtor). Without the debtor’s act making the third party’s payment effective to discharge the debtor’s debt owed to the creditor, it is more difficult for a Court to find that the debtor was a party to the transaction (as required by s 588FA) and in effect made the payment to its creditor, using the third party as its instrument.

To return to the present judgment – The Full Court noted that the conditions required for the transaction to fall within s 588FA(1) were satisfied – the company Mortlake and the creditor the Commissioner were parties to the transaction, the transaction resulted in the Commissioner receiving from Mortlake more than he would receive if the transaction were set aside and he were to prove in the winding up [at 44-46].

“Unfairness”

The Commissioner then submitted that the payments could not fall within the definition of an unfair preference in s 588FA(1), because “unfairness” is a necessary element of the definition and, in his submission, there was nothing in the payments that satisfied this requirement. Their Honours reviewed the authorities and at [54-55] said this –

“[T]he observations of the plurality in Airservices and the doctrine of ultimate effect, as applied by Ormiston JA [in Dye] to the present statutory regime, provide a short answer to [the Commissioner’s] submissions. This is because in the present case there are only two transactions between the debtor and the creditor, each of which consisted of a payment which had the ultimate effect of extinguishing the indebtedness of Mortlake to its creditor. That is to say, each transaction had the effect of paying the Commissioner 100c in the dollar in respect of Mortlake’s indebtedness of $70,000…[T]he payments constituted an unfair preference because the Commissioner received full payment of the debt whereas other creditors would receive nothing in the winding up. As Ormiston JA explained in Dye at [39], s 588FA was intended to strike down transactions that would dislocate the statutory order of priories among creditors…That is what happened in the present case.”

The Commissioner ran the submission there was no unfairness because the payments did not result in a decrease in the net value of assets available to meet the demands of other creditors. The Full Court held there was such a decrease and stated that they did not then need to determine whether there must be a diminution in the value of the debtor’s assets for a payment to be caught by the provision (see [58-61]). (See the similar argument run by the defendant in Burness at [49], although advanced in a different way.)

Second issue – Allocation of payments by the Commissioner 

The Commissioner pointed to his power to allocate payments to the SGER account by virtue of the provisions of Div 2 of Part IIB of the Administration Act. Section 8AAZD confers power on the Commissioner to allocate a primary tax debt to an RBA, such as the SGER account, which had been established for that type of tax debt. In exercising the power of allocation, the Commissioner is not required to take account of any instructions from a tax payer: see s 8AAZLE (at [68]).

The Liquidator submitted that the two payments in question were allocated to the integrated client account. He pointed to the crediting of the two payments to the integrated client account, and relied on the fact that interest charged by the ATO on the balance of that account had been calculated taking account of the reduction of the balance by virtue of the two payments.

Once so allocated, he submitted, they constituted the relevant transaction for the purposes of s 588FA(1) (see [69]). The Full Court agreed [79], holding that the transactions that fell to be considered under s 588FA(1) were the two payments made in March and April 2007. On this approach, the Commissioner’s reallocation was irrelevant to the question of whether the transactions fell within s 588FA(1).

On the evidence, their Honours could not determine whether there was an actual agreement between Mortlake and the ATO to appropriate the $70,000 to the integrated client account [77]. Therefore, their Honours said, the rule in Clayton’s Case would apply and the payments are presumed to be appropriated to the debts in the order in which the debts were incurred. However there was no evidence to establish that sequence.

Nevertheless, the Full Court saw considerable force in the Liquidator’s submission that the ATO Tax Agent Portal, recording the payments and the interest charge referred to, gives rise to a strong inference that the payments were allocated to the integrated client account. This was reinforced by the fact that the payments remained credited to that account, in full satisfaction of the pre-existing debt of $70,000, until the reversal on 1 August 2007 [78]. As noted above, their Honours concluded that the two payments were the relevant “transaction” and thus the ATO’s later reallocation and the argument they sought to mount as to the priority accorded the Commissioner for payments of superannuation guarantee charge liabilities was irrelevant.

Their Honours noted at [80 onwards] that even if they were wrong on that, the allocation or reallocation on 1 August 2007 did not change the result, in that the Commissioner still received more than he would were he to prove for the debt in the winding up, and thus received an unfair preference.

The Full Court observed that it was also implicit in the Liquidator’s submissions that on the proper construction of s 8AAZD of the Administration Act, the power of allocation does not extend to a power of reallocation to another ATO account. Thus the Commissioner had no power to so reallocate [70]). The Full Court took the view that it did not need to determine this question [88].

However in the final two paragraphs of their judgment, the plurality went on to observe that there was a further answer to the Commissioner’s claim to be able to rely upon the purposed (re)allocation which took place on 1 August 2007. The Full Court went further than the judge at first instance had done, and made a specific finding that it was plain the Commissioner took the step of reversing and (re)allocating the payments to the SGER account “with a view to obtaining a priority over other unsecured creditors in the event that [the petitioning creditor] obtained a winding up order when the matter was due to come before the Supreme Court on 23 August 2007” [90]. Their Honours observed at [91] that –

“It is a fundamental principle of the law of unfair preferences that the present statutory regime, and its predecessors are…intended to render void any transaction which, if allowed to stand, would dislocate the statutory order of priorities amongst creditors.”

Yet, so their Honours specifically held, “that is precisely what the Commissioner intended to achieve”.

An extraordinary case. The Commissioner’s appeal was dismissed. The fact that costs were awarded against the Commissioner, suggests that despite the fact that only $70,000 was at stake and that the principles are clearly of some importance, the Commissioner has not been funding the Liquidator’s costs as is sometimes done in “test cases”. One cannot help but wonder how the Commissioner will respond to this loss at Full Federal Court level – whether he will bat on and seek special leave to appeal, or call it a day. We await any further developments with interest.

Postscript:  A final word on unilateral reallocation of payments between accounts by the ATO

The argument that the Commissioner sought to mount, relying upon his office’s unilateral reallocation, warrants a moment of slower scrutiny:  that the effect of the reallocation was to elevate the priority of the debt in the winding up of Mortlake in accordance with the provisions of s 556 of the Act, so as to give it priority over other unsecured debts. The Commissioner contended that this had the consequence that the payments could not constitute unfair preferences because, at the time of the allocation to the SGER account, there were no other outstanding debts with priority equal to or higher than that which applies to the superannuation guarantee charge under s 556(1)(e) of the Act.

If this argument had succeeded, it would mean that for each corporate taxpayer sinking towards liquidation, the Commissioner could take steps to artificially circumvent the operation of the preference provisions and stride ahead of other unsecured creditors. All the ATO need do is reverse the allocation of payments made into the taxpayer’s integrated client account, reallocate them to the SGER account, and then claim the payments were thereby out of the liquidator’s reach.

If the Commissioner is unconstrained in purporting to exercise his allocation power under s 8AAZD of the Administration Act in this way, and rely upon it to seek such an advantage, one wonders what the answer might be to this rhetorical question:

Now that directors can be made personally liable for the unpaid and unreported superannuation guarantee charge liabilities of their companies (since 30 June 2012), what is to stop the Commissioner from purporting to exercise  his allocation power to reallocate in the other direction? That is, what is to stop the ATO from enlarging the company’s SGC liability balance by reversing payments already made against it and reallocating them instead against GST liability recorded in the integrated client account, thereby artificially enlarging the debt that can be claimed personally against the directors? I note that the ATO has previously sought to have the DPN regime extended by the legislature to other tax liabilities including GST liabilities, however Parliament (or rather, the Parliamentary committee) has declined, and limited the extension of the DPN regime beyond a company’s PAYG to now also its super guarantee charge liability. Conceivably, the ATO could skirt around that legislative constriction too, to enlarge the size of the personal liability it can sheet home to directors. Troubling.