Statutory demands – setting aside under s 459G – what is a ‘genuine’ dispute or offsetting claim?

When a company is served with a statutory demand it may apply to Court to set it aside under s 459G Corporations Act 2001 (Cth) (see also s 459J). Where the ground for the application is that the company disputes that it owes the debt, or has an offsetting claim, s 459H requires that this be genuine (see s 459H(1) and the definition of ‘off-setting’ claim in s 459H(5)). So – when will an alleged dispute or off-setting claim be accepted as genuine? Or what should be pointed to as demonstrating that it is not?

Practitioners will in some cases quickly form a preliminary view on this based upon the old ‘smacks of recent invention’ hallmark. Certainly that preliminary view may be borne out on closer examination, as was the case in a Court of Appeal decision in which I appeared some years ago – Rescom Asia Pacific v Reapfield Property Consultants Pty Ltd [2014] VSCA 92. However there is of course more to it than that. Often a fair amount of evidence is filed, which must be addressed by the parties and considered by the Courts in making a determination. Hence it is worth having regard to the principles that govern this issue.

Principles – ‘genuine’

The principles to be applied in applications to set aside statutory demands are well settled, though they are sometimes restated or collected together in different ways or with different emphases in the authorities. On this particular issue / element, my distillation of the key principles are as follows:

To be accepted as ‘genuine’[1] a dispute or offsetting claim must be shown to be both real, have some merit, and be plausible,[2] as well as authentic, not spurious or artificial or have been ‘manufactured or got up’.[3] In summary – 

  1. “The threshold is not high or demanding; a genuine dispute means there must be a plausible contention requiring investigation; and it is only if the applicant’s contentions are so devoid of substance that no further investigation is warranted that the applicant will fail. The court is not called on to determine the merits of, or to resolve, the dispute.”[4] The essential task is relatively simple – to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).[5]
  2. “This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit ‘however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be’ not having ‘sufficient prima facie plausibility to merit further investigation as to [its] truth’.”[6]
  3. The questions for the Court have been identified as: “whether there is such a dispute and, if there is, whether it is genuine.” [7]
  4. “The claim must not be spurious or artificial, or have been ‘manufactured or got up simply for the purpose of defeating the demand made against the company’.”[8] “If the dispute is of that quality and is accordingly not advanced in good faith, it is not ‘genuine’.”[9]
  5. “[T]he court must decide whether the grounds of dispute delineated by the affidavit are grounds which, when viewed in the whole of the circumstances emerging from the evidence, indicate a plausible defence propounded in good faith and not one merely constructed in response to the pressure represented by the statutory demand.”[10]
  6. “Where an applicant to set aside a statutory demand contends for the existence of an offsetting claim it bears the onus of establishing that it is genuine in the sense of being authentic or bona fide, and real, not spurious, and not frivolous or vexatious.”[11]

In terms of the evidential burden and onus on the applicant – 

  1. “In order for [an alleged claim] to be genuine, there must be sufficient factual material to support the essential elements that go to make up that claim.”[12]
  2. “…the onus rest[s] on the [applicant] to provide a sufficient account of its dealings…to raise a genuine dispute and take the matter beyond mere assertion.”[13] 

Case Study

In Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85, Alpine Valley applied under s 459G (engaging s 459H and 459J) to set aside a statutory demand for just under $160,000 served on it by Grainlink in 2019 for unpaid invoices for grain supplied in 2018. The two companies had been trading since 2013.

Alpine Valley alleged an offsetting claim due to the alleged presence of weevils its customers had found in grain Alpine Valley had supplied to them, which it had acquired from Grainlink. Alpine Valley contended the grain was contaminated with weevil larvae at the time it was supplied by Grainlink, which had made the grain adulterated and unfit for purpose, causing Alpine Valley loss and damage. Alpine Valley estimated the value of that offsetting claim as almost $228,000, exceeding the amount of the statutory demand. (see [6]-[7],[23], [30])

Grainlink gave evidence as to is rigorous treatment and testing procedures for eliminating weevil and larvae from all grain (see [65]). Grainlink argued that Alpine Valley’s alleged offsetting claim was unsupported by probative evidence and was spurious (see [9] and [133]). Whilst Alpine Valley alleged that weevils had been a ‘constant issue’ (see [29]), Grainlink pointed out that the first time any issue was raised with them was when Alpine Valley filed its application to set aside the statutory demand in 2019 (see [132]).

Gardiner AsJ held that the offsetting claim was not genuine, based on the fact that the claim was only made after service of the demand, and was preceded by numerous promises to pay, with the reasons proffered for non-payment being cashflow problems and the internal turmoil within the company (the directors were in dispute). His Honour found that the alleged offsetting claim was not genuine, rather, it was spurious and had been ‘got up’ as an attempted means to defeat Grainlink’s demand. The application was dismissed. (see [148])

In particular, Gardiner AsJ found that the following features of the dealings between the parties in this case were ‘particularly powerful’ in convincing him that Alpine Valley’s alleged offsetting claim was not genuine (see [146]) –

  1. There was no notification of any kind by Alpine Valley of its alleged offsetting claim to Grainlink until it first served its material to set aside the statutory demand.
  2. There was evidence that Alpine Valley’s customers had received contaminated product from Alpine Valley. There were no contemporaneous documents generated by Alpine Valley connecting any of those complaints with Grainlink.
  3. Even if Alpine Valley had demonstrated that it had a genuine and arguable claim that Grainlink was responsible for the contaminated product, which his Honour found it had not, there was insufficient evidence to support the quantification of loss Alpine Valley claimed to have suffered as a result.
  4. Alpine Valley now claimed that throughout the trading period there was an endemic problem with weevil infestation in the grain. However Alpine Valley had paid all of Grainlink’s invoices between July 2013 and July 2018 without complaint.
  5. In December 2018, when Grainlink was pressing for payment of its invoices and any alleged claim would have been known to Alpine Valley, it simply conceded the amounts were overdue and a payment plan would be implemented.
  6. In January 2019 when Grainlink followed up, Alpine Valley responded that they hoped to pay $10,000 or $20,000 by the end of the month and hopefully a larger amount the following month.
  7. Grainlink then passed the matter to is collection agency. If Alpine Valley genuinely considered it had an offsetting claim, it would have raised it in its communications with the agency, and would not have been making promises to pay the debt in full.
  8. On 16 May 2019 shortly before the issue of the statutory demand, Alpine Valley made a payment of $10,000. Alpine Valley never explained why it would do so if it had a belief it had a genuine offsetting claim for a greater amount than it owed Grainlink.
  9. The age of the alleged offsetting claims, now said to have arisen throughout the trading period, was implausible.

While it is often said that the bar is not high or demanding in applications to set aside statutory demands, it still must be cleared. That an alleged dispute or off-setting claim is ‘genuine’ must be shown. In assessing the evidence, what the contemporaneous documents do – and do not – show will always be significant. For another recent example of a case involving promises to pay made without mentioning offsetting claims later raised to support an application to set aside a statutory demand, see Re CMG Automotive Pty Ltd [2020] VSC 779 – see [161], [164], [174].

[1] Within the meaning of s 459H(1) and (5).

[2] See quotes from authorities drawn together in Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [7] per Perram J; See also Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137 at [33] per Ball J and the authorities there cited.

[3] See below.

[4] SGR Pastoral Pty Ltd v Christensen [2019] QSC 229 per Bowskill J, citing Citation Resources Ltd v IBT Holdings Pty Ltd [2016] FCA 1265; (2016) 116 ACSR 274 at [17] per McKerracher J.

[5] Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601, 605 per Thomas J; cited with approval in In the matter of Essential Media and Entertainment Pty Ltd [2020] NSWSC 990 at [81] per Rees J.

[6] Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, 787 per McLelland CJ in Eq, oft-cited and applied, as for example in Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [63] per Bell P.

[7] Viva Olives Pty Ltd v Origin Olives Australasia Pty Ltd [2012] FCA 545 at [8] per Perram J.

[8] SGR Pastoral at [52], quoting from JJMR Pty Ltd v LG International Corp [2003] QCA 519 at [18]; See also the citing of the ‘must not have been manufactured or got up’ principle from JJMR Pty Ltd in: Brandon Industries (Vic) Pty Ltd v Locker Pty Ltd [2016] VSC 373 at [150] and Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85 at [17].

[9] Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60 at [95] per White JA, quoting from Creata (Aust) Pty Ltd v Faull [2017] NSWCA 300; 125 ACSR 212 at [47] per Barrett AJA.

[10] Ligon 158 Pty Ltd v Huber [2016] NSWCA 330 at [10] per Barrett AJA, McColl and Meagher JJA agreeing.

[11] Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd [2020] VSC 85 at [15] per Gardiner AsJ.

[12] Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2011] NSWSC 137 at [40] per Ball J.

[13] Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd [2017] VSCA 51 at [78], citing Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787 (McLellan CJ in Eq), TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008] VSCA 70; (2008) 66 ACSR 67 at [71] (Dodds-Streeton JA,Neave and Kellam JJA agreeing).

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

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.

Three newsflashes (two ironically juxtaposed) and a hohoho

Yesterday saw two developments on the same day; both insolvency practitioner-related and, as you will see, that the two occurred on the same day was certainly ironic. First, the Parliamentary Secretary to the Federal Treasurer and Attorney-General released an exposure draft of the primary amendments to be included in the Insolvency Law Reform Bill. The Bill implements the first tranche of reforms previously released in a proposals paper directed at modernising and harmonising the regulatory framework applying to insolvency practitioners in Australia, and how they are registered, disciplined and regulated. The stated aims include to increase transparency and accountability, and improve communication, high professional standards and the community’s confidence in the effective regulation of insolvency practitioners. For more information and to read the exposure draft and its accompanying explanatory material, go to the Treasury’s webpage here. The closing date for submissions is 8 March 2013.

The second development yesterday was the revelation that accounting firm RSM Bird Cameron had issued proceedings against a former partner in the firm, an insolvency practitioner of 20 years standing, which included allegations of breaches of fiduciary duty and fraud. Yesterday Chief Justice Warren of the Victorian Supreme Court delivered judgment on an injunction application the liquidator had issued, seeking to restrain Fairfax Media Ltd from publishing the allegations. Her Honour, after reviewing the key principles derived from the authorities and considering the submissions made by the parties, refused the application.

The third newsflash, on a different topic, is the recent announcement by the Victorian Supreme Court as to changes to the procedure for appeals from a decision of an Associate Justice, to commence on 1 January 2013. The principal amendments are to Rule 77.06 et seq of the Supreme Court (General Civil Procedure) Rules 2005, are contained in the Supreme Court (Associate Judges Appeals Amendment) Rules 2012 (link). Essentially, appeals from Associate Judges to a Judge of the Trial Division will be by way of re-hearing (such that error must be shown), rather than by a re-hearing de novo. Procedures will include a requirement that Notices of Appeal be served within 14 days. For more information, click on the above link to the announcement, and see new Practice Notice 4 of 2012 (link).

The amendments include the addition of a new Rule 16.5 to the Supreme Court (Corporations) Rules 2003, to apply the new procedures also to appeals from Associate Judges in corporations matters. New Rule 16.5 will further provide that an appeal will lie to the Court of Appeal:

  • in an application under s 459G of the Corporations Act (applications to set aside statutory demands); and
  • in respect of any matter referred to an Associates Judge by a Judge of this Court under Rule 16.1(3).

Finally, Merry Christmas to all, and my wishes to you and your families for a happy and healthy 2013. My apologies that the busy demands of my practice have reduced my rate of writing on this site in recent months. May you all enjoy a wonderful and restful break in the weeks to come.

Statutory demands – risks of service by post

A recent Federal Court decision has highlighted the risks run by a creditor who serves a statutory demand on a company by post – Deputy Commissioner of Taxation v Manta’s on the Beach Pty Ltd [2012] FCA 417 (link). The result was that the winding up application was dismissed.

The Commissioner used the post as the means of serving the statutory demand in this case. I do not propose here to review the various provisions which permit service by post and which provide for presumptions as to by when documents sent by post are taken to have been served, including s 109X of the Corporations Act 2001 (Cth), ss 28A and 29 of the Acts Interpretation Act 1901 (Cth) and ss 160 and 163 of the Evidence Act 1995 (Cth). However see the Court’s detailed discussion of them and key authorities in another recent case of Deputy Commissioner of Taxation, in the matter of ABW Design & Construction Pty Ltd v ABW Design & Construction Pty Ltd [2012] FCA 346 (link).

Here, the Commissioner proved that the statutory demand with its supporting affidavit was sent by prepaid post in an envelope which bore the address of the defendant company’s registered office. The Commissioner also adduced evidence – which was accepted – of a system maintained at the ATO for the recording of any correspondence, including statutory demands sent by post, which end up returned undelivered or otherwise returned to sender. There was no record within that system of this statutory demand and supporting affidavit having been returned to the ATO. The Commissioner also led evidence about Australia Post’s usual delivery times.

However against this, the defendant company’s sole director Mrs Battersby succeeded in proving the documents were not received. She gave evidence that she lived at the same address as the registered address of the company. Mrs Battersby “stated unequivocally” that she did not receive any correspondence by mail from the Commissioner enclosing a statutory demand in August or September 2011. She was confident that she would remember the receipt of such a document. She gave evidence that she rarely collected the mail herself; instead her then husband would collect it from the mail box located at the side of the property, and leave any mail for her or the company on the kitchen bench at the property, or in the dining room, or on her desk; Mrs Battersby’s practice was regularly to open and review any mail including that addressed to the company; her practice was not to dispose of mail without first opening it and checking its contents. Mr Battersby confirmed her evidence as to these mail collection and placement practices. Neither was required for cross-examination.

Logan J acknowledged the element of self-interest which “attends at least Mrs Battersby’s evidence”, though he noted it does not attend Mr Battersby’s, and on balance, accepted her evidence. His Honour made a positive finding that the statutory demand and affidavit was not received at all at the company’s registered office in August or September 2011 and that Mrs Battersby first became aware of it in an email from the ATO in March 2012 (see [9-12]). His Honour noted that this carried with it a finding that the documents were not delivered to the company’s registered office in August or September 2011.

It followed, so his Honour found, that when the application for winding up was filed by the Commissioner there had been no non-compliance by the company with the statutory demand. That document had not been served on it (see [16]). His Honour did remark that perhaps if there had been more specific evidence concerning, for example, an absence of any delivery difficulties at the time in respect of mail as between Moonee Ponds and Yeppoon, as is sometimes lead, there may have been a “greater interrogative note” in respect of Mr and Mrs Battersby’s evidence.

His Honour went on to consider whether, in the absence of the presumption of insolvency afforded by non-compliance with a statutory demand, the Commissioner had satisfied the onus of proving the company was insolvent. Logan J held that the Commissioner had not. The winding up application was dismissed, with costs.

A curious decision perhaps, but it does illustrate that where service of a statutory demand is effected by post, the creditor relies only on statutory presumptions as to receipt, and has no actual proof of it. This may leave a creditor open to proof to the contrary, as occurred here, noting that the standard of proof is of course the civil standard of “balance of probabilities”. While a body serving a high volume of statutory demands like the ATO may be unlikely to alter it’s practices for reasons of cost, individual creditors serving statutory demands might be wise to consider using a well-instructed process server.