Decision impact statement

Commissioner of Taxation v Kassem


Court Citation(s):
[2012] FCAFC 124
(2012) 205 FCR 156

Venue: Federal Court
Venue Reference No: 3880 of 2008
Judge Name: Jacobson, Siopis & Murphy JJ
Judgment date: 31 August 2012
Appeals on foot: No
Decision Outcome: Adverse

Impacted Advice

Relevant Rulings/Determinations:
  • N/A

Subject References:
Unfair preference
Priority of debts
Allocation of payments

Précis

Outlines the ATO's response to this case, which concerned whether payments received by the Commissioner in the company's running balance account and later allocated to pay its superannuation guarantee charge debts, are unfair preferences.

Brief summary of facts

The liquidators of 081 741 531 Pty Ltd, which was formerly known as Mortlake Hire Pty Ltd ("Mortlake"), sought to recover two payments in the total sum of $70,000.00 ("Payments"), as unfair preferences pursuant to section 588FA of the Corporations Act 2001 ('the Act").

The Payments were made to the ATO on behalf of Mortlake by a related third party entity, with Mortlake's authority, and were initially paid into Mortlake's running balance account. The Payments were subsequently applied to reduce Mortlake's superannuation guarantee charge ("SGC") debts.

At first instance, Nicholas J of the Federal Court decided that in accordance with section 588FA of the Act, the Payments were unfair preferences because the Commissioner received more in payment of the unsecured tax debts owed by Mortlake, than he would have received if the Payments were set aside and the Commissioner had to prove for those unsecured debts at the winding up of Mortlake.

The Commissioner appealed against the decision of Nicholas J on the basis that his Honour erred in finding that the Payments were unfair preference payments.

Issues decided by the court

The Full Federal Court comprising Jacobson, Siopis and Murphy JJ dismissed the Commissioner's appeal.

The Full Federal Court agreed with the Court at first instance that the relevant time to consider the preferential nature of a payment is at the actual winding up of the company and not a hypothetical winding up of the company at the time that the payment was made.

The Full Federal Court noted that liquidators' costs are necessary and inevitable if creditors wish to have the affairs of an insolvent company properly investigated. Liquidators are therefore creditors in the actual winding up and in accordance with section 556 of the Act, their fees and expenses rank ahead of the SGC debts.

Consequently, the Payments are unfair preferences because the Commissioner received more than he would in the actual winding up of Mortlake, where after payment of the Liquidators' costs, there was no dividend to the creditors.

The Full Federal Court considered that the relevant transactions, for the purposes of section 588FA of the Act, were the payments into Mortlake's running balance account. The Payments were, therefore, not paid in respect of the company's SGC liabilities and could not be afforded any status of priority pursuant to section 556 of the Act.

The Full Federal Court's decision that the liquidators' costs have priority in the winding up of Mortlake, leads to the same conclusion without the Court having to finally determine whether the Commissioner's allocation, or reallocation, of the Payments to the SGC account had the effect of making it a transaction in respect of a SGC and not a transaction in respect of the running balance account.

ATO view of Decision

The Commissioner did not apply to the High Court for special leave to appeal against the decision.

It was previously the Commissioner's position that to determine whether a payment was an unfair preference, it was necessary for the liquidator to show that the Commissioner was preferred when the payment was made. That is, it was necessary to show that there was another unsecured creditor in existence at the time of the impugned payment, who received less in the actual winding up of the company by reason of the impugned payment.

However, the Federal Court in this case has authoritatively decided that the time to determine the preferential effect of payments is at the time of the actual winding up of the company. The Commissioner will act on that basis in future windings up.

The Full Federal Court distinguished personal preference matters, where for an impugned payment to be void, there must be at least one other creditor of the bankrupt at the time of the alleged preference payment whose debt remained unpaid as at the date of sequestration, and that creditor received less then the amount the Commissioner would receive from any distribution in the bankrupt's estate.

For the purposes of the unfair preference provisions, the Full Federal Court found that the relevant "transactions" were the payments made to Mortlake's running balance account.

It was not necessary for the Full Federal Court to make a decision about the Commissioner's powers to allocate or reallocate payments. It stated at [80] that the "allocation or reallocation [of the payments] does not bring about a different result." That is, there were no funds available to creditors, after payment of the liquidators' fees and expenses, to even consider any priority afforded to SGC debts.

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.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

N/A

Implications on Law Administration Practice Statements

N/A

Legislative References:
Corporations Act 2001
588FA
588FE
566
Part 5.7B

Bankruptcy Act 1966
122

Superannuation Guarantee (Administration) Act 1992
The Act

Taxation Administration Act 1953
Part IIB

Case References:
Airservices Australia v Ferrier
(1996) 185 CLR 483

Andrews v ANZ Banking Group Ltd
(2011) 86 ACSR 292

Burness v Supaproducts Pty Ltd
(2009) 259 ALR 339

Devaynes v Noble; Baring v Bole; Clayton's Case
(1816) 1 Mer 572
35 ER 781

Pegulan Floor Coverings Pty Ltd v Carter
(1997) 24 ACSR 651

Re: Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd
(1997) 147 ALR 281

VR Dye & Co v Peninsula Hotels Pty Ltd
[1999] 3 VR 201

Walsh v Natra Pty Limited
[2000] 1 VR 523