SUPREME COURT OF NEW SOUTH WALES

Deputy Commissioner of Taxation v Tideturn Pty Ltd

[2001] NSWSC 217

Santow J

26 March 2001 - Sydney

Santow J.

Introduction

The central issue

This is an application by the Deputy Commissioner of Taxation for recovery from a liquidator in relation to failure to ensure the retention of moneys to pay group tax. It is not made in circumstances of any dishonesty by the Liquidator. But serious questions are raised as to the Liquidator's diligence and attention to the matter when it came to holding back group tax. The central issue is whether the Liquidator Mr Andrew should be allowed to be released under s 481 of the Corporations Law, subject to making good that proportionate liability for group tax under s 481(2) of the Corporations Law. That liability arises here where there were insufficient assets to satisfy group and other ranking claims. The Liquidator seeks relief under s 1318 of the Corporations Law on the basis that he, not having acted dishonestly, ought fairly to be excused in all the circumstances.

2 By notice of motion filed 24 November 2000, the matter commenced by Mr William Edward Andrew, the liquidator of Tideturn Pty Ltd (Tideturn) seeking orders pursuant to s 480 of the Corporations Law that he be released as liquidator of Tideturn and that the company be dissolved, and orders pursuant to s 1318 of the Corporations Law that he be released from all liabilities incurred during his administration of the winding up.

3 The Deputy Commissioner of Taxation objects to the grant of a release to the liquidator under s 480(d) of the Corporations Law (see the Notice of Objection under Pt 80A r 33(5) of the Supreme Court Rules 1970 (NSW)).

4 The basis of the Commissioner's objection is that the liquidator breached his duty in failing to pay all the expenses incurred in carrying on the business of Tideturn after his appointment as liquidator, because Tideturn failed to remit to the Commissioner group tax deductions from employees' salaries and wages totalling (including penalties) $119,504.63. This was a post liquidation debt payable as a priority payment under s 556(1)(a) of the Corporations Law, and in the event of insufficient funds being available, the liquidator was obliged to pay such debt proportionately together with all other debts referred to in s 556(1)(a) of the Corporations Law, by reason of s 559 of the Corporations Law.

5 In the circumstances, the Commissioner has suffered loss by reason of the Liquidator's breach of duty, being the amount which would have been paid to the Commissioner if such post-liquidation debt had been paid proportionately with all other debts referred to in s 556(1)(a) of the Corporations Law. This amount is quantified at $101,262.

Chronology of events

6 A chronology of relevant events is set out below. It is essentially undisputed:

17 June 1991	Incorporation of Tideturn Pty Ltd (Tideturn).
6 June 1994	Tideturn commences trading.
5 September 1995	Deed of Agreement to grant a commercial bill for $300,000 between House of Cunningham (HOC) and Tideturn.
8 September 1995	Summons for winding up filed by Deputy Commissioner of Taxation (DCT) claiming the sum of $60,543.62 in respect of unpaid group tax.
20 October 1995	Letter from HOC to Mr William Hamilton promising funds available for Tideturn within the coming week.
24 October 1995	Court Order winding up Tideturn and appointing William E Andrew as liquidator.
30 October 1995	Letter from Mr Andrew to HOC requesting confirmation that funds will be provided pursuant to agreement dated 5 September 1995.
12 December 1995	Report to creditors.

4. Continued Trading

In view of the financial assistance approved prior to my appointment, I have continued the business of the company and enclose statement of receipts and payments.

In the event of the funds to be advanced by the House of Cunningham Ltd not becoming available by 20 December 1995 I will endeavour to sell the business of Tideturn Pty Limited as a going concern.

20 December 1995

Meeting of creditors -

Proposed advance by House of Cunningham Ltd

Mr Alan Dash advised as an Australian director of House of Cunningham Ltd that he had confirmed with his New Zealand principals that the sum of $300,000 was held in Melbourne and would be released to me within a few days.

9 January 1996	Facsimile from Mitchell Group & Associates to "all associates" advising that funds expected to be forthcoming by 11 January 1996.
6 February 1996	Letter from Mr Dash of HOC to Mr Andrew advising that funds expected in account in Melbourne on 8 February 1996.
17 March 1996	Facsimile from Mitchell Group & Associates to Mr Andrew advising funds expected to be transferred to the Mitchell Group accounts "very shortly".
28 August 1998	DCT files statement of claim in District Court against liquidator claiming $119,504.63.
29 March 2000	DCT discontinues District Court proceedings against liquidator by consent.
26 July 2000	Report to creditors.
28 July 2000	Summary of Liquidator's Receipts and Payments disclosing total receipts of $663,578.85 and total payments of $663,578.85, but unpaid trade on expenses of $140,501.82 in respect of unpaid tax instalment deductions from employees' wages and salaries and subcontractors' accounts.
31 July 2000	Notice of intention of liquidator to seek release.
8 August 2000	Notice of application by liquidator published in Commonwealth Gazette.
24 November 2000	Notice of motion by liquidator filed herein.

Additional facts

7 To those facts I would simply add that in oral evidence given by the Liquidator it was apparent that the optimistic assessment that the Liquidator had formed, in deciding to "trade on", that re-financing of $300,000 would be made available by House of Cunningham Pty Ltd proved in the end to be a house of cards. But that did not become fully apparent until the end of December 1995. It is for that reason that the orders which follow take off around 20% from the amount to be recovered from the Liquidator personally for failure to hold back moneys which were properly payable in circumstances where trading on occurred and there were insufficient assets to meet group tax deductions. A further allowance of 5% is made having regard to the fact that the Liquidator took no remuneration. It is made in exercise of the power to grant in this case partial relief under s 1318(1). No greater relief is justified, for reasons elaborated later. Essentially, the liquidator failed to exercise proper supervision over those to whom he had delegated (in Gosford where the business was), to ensure group tax was being paid on a monthly basis while the company traded on. Mr Andrew had the bank statements reconciled monthly, by one of his staff, which simply showed wages paid on a gross basis. Mr Andrew was aware of the obligation to remit and knew the number of staff, yet failed to pick up the problem till June 1996. It appears Mr Andrew, also in good faith, held an unduly optimistic assessment of the value of assets available (fees to be paid for security services) compared to the then known liabilities.

Resolution of relevant issues

8 The submissions of the Deputy Commissioner of Taxation were fairly put and I quote them below:

The Commissioner does not contest the liquidator's honesty in the present administration. The case is one of negligence by the liquidator in failing to ensure (in accordance with his statutory duty) that all priority debts were paid proportionately, in the circumstances of their being insufficient funds available.

When considering "all the circumstances of the case", it is submitted that:
(a) the liquidator did not act reasonably in failing to ensure the company remitted group tax deductions to the Commissioner;

(b) the liquidator's conduct involves a failure to ensure monthly observance by the company with an express statutory requirement under the Income Tax Assessment Act 1936 (Cth);

(c) the length of time during which the liquidator carried on the business of the company was not insignificant, and accordingly the liquidator's failure to ensure that group tax deductions were remitted to the Commissioner cannot be said to be simply a one off oversight;

(d) insofar as the liquidator delegated the carrying on of the business of Tideturn to another person, it was unreasonable for the liquidator to delegate the decision as to which "trade on" creditors should be paid in priority to others, and also unreasonable for the liquidator not to check and ensure that group tax deductions were being remitted to the Commissioner (see Ah Toy v Registrar of Companies (NT) (1986) 10 ACLR 630.

The Court has ample power under s 481(2) of the Corporations Law (on the liquidator's application for a release) to order the liquidator to make good the loss suffered by the Commissioner.

9 I accept those submissions save that I am prepared to deduct 25% or in round figures render the sum recoverable $75,000 rather than the full amount of $101,223. This takes into account that only by the end of December 1995 was the re-financing clearly not available. I also take into account that the liquidator took no remuneration foregoing a sum of around $74,000. The latter is a discretionary matter in his favour relevant under s 1318(1) of the Corporations Law. But not taking remuneration has no effect on the sum to which the Deputy Commissioner of Taxation is by statute entitled; see s 556(1)(a) of the Corporations Law and the exclusion from priority of "deferred expenses". These would include the Liquidator's remuneration (as where the liquidator has the company trade on).

10 No criticism is made of the Liquidator's efforts to sell the business. But the fact remains that the legislation imposes a clear obligation to cause to be remitted group deductions.

11 Thus the obligation to remit group tax deductions was imposed upon the company as the employer (see definition of "employer": s 221A of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936); duty to deduct: s 221C(1A); and liability to pay: s 221F in respect of the period 16 December 1995 to 31 July 1996, and s 221G in respect of the period 1 November 1995 to 16 December 1995).

12 The company was obliged to remit such deductions on a monthly basis (see ss 221F(5)(c) and 221G(2D) of the ITAA 1936).

13 The failure by Tideturn to remit to the Commissioner group tax deductions gave rise to a post liquidation debt payable, but not provable, in the liquidation as a priority payment under s 556(1)(a) of the Corporations Law. This was an expense properly incurred by a "relevant authority" (ie the liquidator), in carrying on the company's business, being an amount which the company was required to deduct and remit to the Commissioner from employees' salaries and wages who were employed in the course of carrying on the business (See also Re Beni-Felkai Mining Co Ltd [1934] Ch 406; Keay, A R, McPherson, The Law of Company Liquidation, (4th Ed), LBC Information Services, 1999, Sydney at 588-89; cf Pace v Antlers Pty Ltd (in liq) (1998) 26 ACSR 490 at 506-07 which is distinguishable on its rather unusual facts).

14 If the property of the company is insufficient to meet debts of a class referred to in s 556(1) of the Corporations Law, then those debts are to be paid proportionately (see s 559 of the Corporations Law). Failure to do so, in the event of insufficient funds being available to the liquidator, would be a breach of duty by the liquidator.

The overall result

15 The Liquidator must pay personally the sum of $75,000 as a condition of a Liquidator's release pursuant to s 481(2) of the Corporations Law and I have so ordered. There is no dispute that that amount is calculated by reference to a proportion set out in the attachment to this judgment.

16 While expressing some sympathy for the Liquidator in the circumstances, that does not go so far as to justify any order more favourable to the Liquidator given his lack of proper supervision to which I have earlier referred (7 above) amounting in my judgment to neglect if not negligence.

DEPUTY COMMISSIONER OF TAXATION
v
TIDETURN PTY LIMITED (in liq)
No 3511 of 1995
Alternative calculation of the Deputy Commissioner of Taxation's (DCT) loss

Commissioner's debt

Total trade on expenses (priority × $661,719
debts under s 556(1)(a) of the Corporations Law)

ie $119,504

$661,719 + $119,504 × $661,719

$119,504

$781,223

$661,719

= $101,223