SMITH v DFC of TJudges:
This matter involves an application under s 588FF of the Corporations Law (``the Law'') for orders directing the respondent to pay to Australian Company Number 007 764 249 Pty Ltd (In Liquidation) (``the company'') two amounts alleged to have been paid by the company to the respondent (``DCT'') in discharge of the company's liabilities to the DCT for tax instalment deductions, pursuant to the Income Tax Assessment Act 1936 (``the Tax Act'') and for sales tax payable under the Sales Tax Assessment Act 1992 (``the Sales Tax Act''). The applicant is the liquidator of the company. The two payments in question are a payment of $194,000 on 3 November 1994 and payment of $41,000 made on 31 January 1995 and received on 6 February 1995. It is necessary to examine in detail the circumstances surrounding those two payments, as the precise categorisation of the nature of those payments is in issue.
The DCT in turn cross-claims against the four cross respondents (``the directors''), who were at all material times directors of the company, pursuant to s 588FGA of the Law to indemnify it in respect of the loss or damage he might sustain resulting from any order made under s 588FF of the Law, but only to the extent that such loss reflects payment to reduce or discharge a liability under s 221F of the Tax Act. It is not submitted that the right of indemnity extends to recovery of payments made in respect of any liability of the company under the Sales Tax Act.
The company was incorporated on 26 July 1974. Its name first was Port Adelaide Sports Depot Pty Limited, but from 11 March 1987 to 16 November 1994 it conducted its business under the name Adelaide Industrial Equipment Pty Ltd. At material times its principal activity was as an industrial equipment supplier.
The company was registered as a group employer under s 221F of the Tax Act. It was therefore obliged to deduct from the salary or wages paid to its employees the taxation payable by those employees, and to pay to the DCT the amount of the deductions by the seventh day of the next succeeding month: s 221F(5)(a)(ii) of the Tax Act, and otherwise to comply with that section. The company was dilatory in remitting tax instalment deductions to the DCT. It paid some of the amounts deducted month by month in a timely fashion, and some belatedly. By November 1994, there were substantial amounts of tax instalment deductions which had become due to the respondent and had not been paid by the company:
Amount Month of Deduction Date due $11,711.61 November 1991 07.12.91 $10,712.87 December 1991 07.01.92 $ 9,346.63 August 1992 07.09.92 $ 8,709.50 April 1993 07.05.93 $ 8,604.96 May 1993 07.06.93 $ 8,604.96 June 1993 07.07.93 $ 7,466.67 July 1993 07.08.93 $ 8,559.91 August 1993 07.09.93 $10,360.15 September 1993 07.10.93 $ 8,975.21 November 1993 07.12.93 $ 8,963.92 December 1993 07.01.94 $10,122.25 January 1994 07.02.94 $ 8,458.97 February 1994 07.04.94 $ 8,539.69 March 1994 07.04.94 $10,882.08 April 1994 07.05.94 $ 8,759.21 May 1994 07.06.94 $ 8,535.12 August 1994 07.09.94 $11,855.99 September 1994 07.10.94 $11,829.37 October 1994 07.11.94
The business of the company involved assessable dealings under the Sales Tax Act, and as the seller it became liable to pay the sales tax on such dealings under s 16 of that Act. In the case of the company, it was liable to pay that tax on or by the 21st day after the end of each month in respect of the assessable dealings during that month: s 63 of the Sales
ATC 4474Tax Act. Again, the company did not comply properly with those recurrent obligations. By November 1994, there were substantial amounts by way of sales tax which had become due to the respondent and which had not been paid:
Amount Month of Dealings Date due $ 4,494.63 January 1993 21.02.93 $ 1,684.85 March 1993 21.04.93 $ 2,355.27 April 1993 21.05.93 $ 1,776.55 May 1993 21.06.93 $ 2,554.87 June 1993 21.07.93 $ 1,460.99 July 1993 21.08.93 $ 2,683.70 August 1993 21.09.93 $ 1,735.79 September 1993 21.10.93 $ 2,118.74 October 1993 21.11.93 $ 2,481.05 November 1993 21.12.93 $ 2,319.61 December 1993 21.01.94 $ 1,734.04 January 1994 21.02.94 $ 1,781.32 February 1994 21.03.94 $ 3,196.41 March 1994 21.04.94 $ 1,157.99 April 1994 21.05.94 $ 2,383.48 July 1994 21.08.94 $ 759.52 August 1994 21.09.94 $ 2,339.27 September 1994 21.10.94 $ 1,670.63 October 1994 21.11.94
From at least February 1992, the outstanding liability of the company to the DCT from time to time was, not surprisingly, the subject of communications between them. Those communications became more intense during 1994. It will be necessary to refer to them in detail, as one issue in the case is whether the payments received by the DCT have the protection of the defence available under s 588FG of the Law.
In 1994, the company took steps to sell its business. It informed the DCT. In late September 1994 it engaged solicitors Kelly & Co to act for it, and those solicitors also had discussions with an officer of the DCT. As it was perceived that Kelly & Co would receive on behalf of the company monies payable to the company at settlement of the sale of its business, the DCT served on Kelly & Co on 5 October 1994 notices in respect of the company's then indebtedness to it given under s 218 of the Tax Act in the sum of $230,887.86, and under s 74 of the Sales Tax Act in the sum of $39,175.20. It will be necessary to have regard to those notices in some detail hereafter.
Ultimately the company agreed to sell its business to Rapid Forklift Hire Pty Ltd (``the purchaser''). Settlement took place on 3 November 1994. Leading up to that settlement, Kelly & Co had negotiated on the company's behalf, at least with its secured creditors and with the DCT, with a view to each of them compromising to some extent their respective claims against the company. As at 25 October 1994, the company was indebted to the DCT in the amount of $300,747.90 in respect of unpaid tax instalment deductions, unpaid sales tax, and additional tax imposed for late payments. Those discussions led to the company and the DCT entering into an agreement to compromise that debt (``the compromise agreement'') recorded in an exchange of letters between solicitors for the company Kelly & Co and the DCT dated 31 October 1994 and 2 November 1994. It will be necessary to advert to that material below, as the precise nature of the compromise agreement and its significance in the light of the two statutory notices under s 218 of the Tax Act and s 74 of the Sales Tax Act (``the statutory notices'') was the subject of dispute. The compromise agreement, in broad terms, was that the DCT would accept:
- (a) $194,000 from the proceeds of sale of the company's business at settlement, then proposed for 1 November 1994, and
- (b) $41,000 plus any amount by which the tax instalment deductions and sales tax payable for the month of October 1994 exceeded $13,500 [later determined to be an additional amount of $1,547.25] from the proceeds of realisation of the stock of the company, to be paid by 15 December 1994.
At settlement the purchaser paid the purchase price by a series of bank cheques, at the request of Kelly & Co as solicitors for the company, including one for $194,000 to the DCT. Subsequently, on 6 February 1995, the DCT received the $41,000 payment contemplated under the compromise agreement.
Certain features of the compromise agreement have already been the subject of determination in this Court:
Smith v DFC of T (1997) 15 ACLC 3. The DCT sought to prove in the winding up of the company for $156,621.31, said to be then the full balance of that outstanding debt less the two payments referred to, on the basis that the compromise agreement had been terminated. It was contended that that was either because time was of the essence of the compromise agreement and the failure to pay the $41,000 on 15 December 1994 meant that the compromise
ATC 4475agreement had been brought to an end, or because the appointment of an administrator to the company of itself gave the DCT the right, which it had exercised, to bring the agreement to an end. The DCT was unsuccessful in those arguments. The compromise agreement was, in the circumstances, found to have continued on foot despite the late payment and despite the appointment of an administrator to the company. The balance of $1,547.25 which had been tendered to the DCT by the applicant on behalf of the company on 22 June 1995, and rejected at that time, has since been paid.
On 5 April 1995 the applicant was appointed administrator of the company by resolution of its directors, and on 9 May 1995 he was appointed liquidator of the company by resolution of its creditors.
Section 513C of the Law prescribes in those circumstances that the date of the commencement of the winding up of the company is therefore 5 April 1995. It is accepted that, for the purposes of any exercise of the Court's powers in respect of voidable transactions under s 588FF of the Law, the relevant period for the purposes of determining whether payment of the two amounts or either of them may constitute a voidable transaction is the six month period commencing on 6 October 1994. The two payments in question were made within that period.
Section 588FA(1) identifies a transaction as an unfair preference given by a company to a creditor of the company if, and only if, two conditions are met, namely:
- (a) that the company and the creditor are parties to the transaction, and
- (b) that the transaction results in the creditor receiving from the company in respect of an unsecured debt that the company owes to the creditor more than the creditor would receive from the company in respect of the debt if the transaction was set aside and the creditor were to prove the debt in the winding up of the company. ``Transaction'' is defined in s 9 of the Law to include a payment made by the company.
Section 588FC of the Law defines an insolvent transaction to include an unfair preference which happens when the company is insolvent. An insolvent transaction within the period referred to then becomes a voidable transaction under s 588FE, and the Court is empowered to make the orders sought under s 588FF.
The respondent's defence raised a number of matters, but ultimately in submissions it rested its defence on four principal points:
- (1) Section 221P of the Tax Act, until its repeal by the Taxation Laws Amendment Act (No 3) 1995, provided the DCT with a priority to recover tax instalment deductions which were payable before 31 May 1993, so as to insulate from the applicant's claim the first six amounts for such instalments set out above and totalling $49,085.57. The applicant's response is threefold: the two payments were not made in respect of any liability under the Tax Act, but made under the compromise agreement; secondly that s 221P of the Tax Act as then in force did not protect the respondent from having to disgorge the payment, as distinct from giving it priority, as it was then subject to the statutory regime of priorities including the priority to the DCT but subject to earlier priorities as well: s 556 of the Law; and thirdly, the amount of $8,604.96 which became payable on 7 June 1993 is not within the period of operation of s 221P in any event.
- (2) The respondent is protected under s 588FG(2) from any order being made under s 588FF because the respondent has proved that:
- "(a) the person became a party to the transaction in good faith; and
- (b) at the time when the person became such a party:
- (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
- (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and
- (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction."
- (3) As a consequence of the service of the statutory notices,
- (i) the statutory notices of themselves and in the events which happened changed the debt from one owing by the company to the DCT to one owing (and paid) by Kelly & Co so that at the time of payment, neither payment was a payment by the company, again meaning that the provisions of s 588FA did not come into play
- (ii) the respondent became a secured creditor of the company to the amounts specified in the statutory notices, and consequently s 588FA which operates only in respect of the receipt from a company of an amount in respect of an unsecured debt, did not apply at the time of either of the two payments.
- It is part of that submission to then assert that the creation of the statutory charge, or the assignment, is not itself impeachable under ss 588FA, 588FC and 588FF of the Law.
- (4) By the operation of the Sales Tax Act the monies thereby identified as sales tax payable by the company to the DCT became, at the time of the sale, monies of the DCT so that to the extent that the two payments reflect the payment of sales tax, they were not payments then made by the company of or from its own monies and consequently no question of any preferential payment arises; it was not submitted that this submission applied to the payments in so far as they reflected payment of income tax instalments, presumably in the light of s 588FG(3) of the Law.
- This contention relied upon the decision of Nathan J in
Sands & McDougall (Wholesale) Pty Ltd (in liquidation) v FC of T 96 ATC 5217; (1997) 15 ACLC 115 in which the Commissioner successfully resisted a liquidator's claim to recover as a preference belated payment of substantial arrears of sales tax during the relation back period, not only because the ``running account'' defence under s 588FA and the ``good faith'' defence under s 588FG of the Law were each made out, but also because the payments of arrears of sales tax were not capable of constituting preferential payments because they were not payments of debt at all, but remittances of the FCT's own money gathered by the company as part of the sales tax mechanism. The DCT in this matter has, since the hearing, informed the Court that it does not, despite that decision, submit that the effect of recovery of sales tax can never be a preference because the remitted sales tax was never the company's money. Accordingly, I do not need to pursue that question. Nor do I need to consider, at least in respect of this particular argument, the applicant's responses that that decision itself was in error, and secondly that the two payments were made in respect of the compromise agreement, and not in respect of the arrears of sales tax so as to distinguish that decision in any event.
There are two matters which the applicant must prove, and which the DCT did not gainsay in the final submissions, namely that at the time of each of the payments the company was insolvent, and that the effect of each of the payments received by the DCT was to advantage him compared to the amount he would receive if the transaction comprising the payment or payments was set aside and the DCT were to prove for the debt in the winding up of the company. I can accordingly deal with those matters relatively shortly.
The evidence of Anthony Milton Sims, chartered accountant, including his report of 18 March 1996, and of the applicant including his report dated 11 April 1996, was received without opposition. That material was not sought to be tested in cross-examination. That is the extent of the material on those two topics. I accept that evidence and make the following findings on the basis of it.
Mr Sims' focus was at 5 October 1994, the start of the relation back period. His analysis of the affairs of the company disclosed that, as at that date, it had a deficiency of working capital of $323,630 and that after taking into account its net assets and liabilities its net liabilities exceeded its assets by $348,521. In those calculations, the amount allowed for as owing to the DCT is $269,615; that is the total of the two amounts in respect of which the DCT served statutory demands under s 459E(2)(e) of the Law on the company dated 30 September 1994, being for $230,513.57 and $39,101.71 for tax instalment deductions and sales tax then outstanding respectively. Of course, having regard to the definition of ``solvent'' in ss 9 and 95A of the Law, the working capital figure is
ATC 4477more immediately relevant as an indication of the ability of the company to pay its debts as and when they fell due. As at that date, that is 5 October 1994, clearly the company required a substantial injection of working capital both for ordinary operations and to repay its outstanding taxation liabilities. It had no assets available to procure such funds by sale, and its inability to offer any security to support further borrowing indicates that it had no real prospect of borrowing the necessary funds from its financiers. There were no apparent prospects of any further equity injection. Consequently, as at that date, I am satisfied that the company was insolvent: it had a deficiency of assets over liabilities and significant working capital shortage that could not be funded by the company. Its ordinary trading did not provide any prospect of those financial deficiencies being relieved through that process.
That of course is a starting point only, because at and subsequent to 3 November 1994 its business was sold, and its secured creditors and the DCT had agreed to compromise certain outstanding liabilities.
That picture is filled out by the applicant's own report as part of his evidence. His conclusion was that, at 3 November 1994, the company had a substantial deficiency in both working capital and net assets, and no ability to procure further funds to meet its debts as and when they fell due either through pledge of unencumbered assets or through other means. Thus, it was insolvent also as at that date. I find accordingly.
There is no evidence directed specifically to the dates 31 January 1995 or 6 February 1995, when the payment of $41,000 was made and received. It is clear, however, from the evidence of the applicant that at the date of his appointment as administrator on 5 April 1995 the company's position had certainly not improved, and indeed worsened. It follows that it was insolvent also at the time of that transaction.
At 5 April 1995, as the applicant determined for his report to creditors for the meeting held on 9 May 1995 pursuant to s 439A of the Law, there was following the sale of the company's business and assets and the application of the proceeds of that sale including stock, an estimated deficiency of assets against liabilities of some $190,796. He recommended to the creditors that they resolve to wind up the company. That recommendation was accepted. The anticipated distribution to creditors in that event, allowing for recovery of a substantial sum as ``preference recovery'' ranged widely between a best case of 78.14 cents and a worst case of 6.39 cents in the dollar. His evidence disclosed that the recovery programme was optimistic, at best, so as at June 1996 (the date of his affidavit) the prospects of ultimate recovery were certainly no better than the best case scenario. At either extreme, I find that the requirement of preference in fact: s 588FA(1) is made out.
Accordingly, subject to the defences mentioned, including whether by reason of the statutory notices the payment of either of the sums was a payment made by the company, it is my view that the two transactions involving the payments is each an unfair preference, and that the company and the DCT were each parties to those two transactions. Thus, subject to the defences, in my view the applicant has made out its case.
Section 221P, Tax Act
Section 3 of the Taxation Laws Amendment Act (No 3) 1995 provided that the Acts specified in the Schedules were amended in accordance with the Schedules to it. Paragraph 33 of Sch 2 repealed s 221P of the Tax Act, and par 51(6) of that schedule provided that repeal did not apply to amounts that became payable under s 221P before 16 December 1995, the day on which that Act received the Royal Assent.
Section 221P(1) of the Tax Act prior to its repeal provided:
``Where an employer makes a deduction for the purposes of this Division,... from the salary or wages paid to an employee and... fails to deal with the amount so deducted in the manner required by this Division..., he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustee shall be liable, to pay that amount to the Commissioner.''
Section 221P(2) provided that an amount payable to the Commissioner by a trustee in pursuance of the section has priority over all other debts, whether preferential, secured or unsecured (subject to certain irrelevant exceptions). Section 221P(3) provided that where a trustee, being the liquidator of a company that is being wound up, is liable to
ATC 4478pay an amount to the Commissioner in pursuance of the section, subs (2) does not operate so as to make the amount payable in priority to any costs, charges or expenses of the winding up of the company. Thus, even if the claim under s 588FF succeeds, the applicant will nevertheless be bound to give effect to the priority created by s 221P of the Tax Act. The obligation to make tax instalment deductions arises under s 221C(1A) at the time of paying the salary or wages to the employee concerned, so that s 221P(1) operated in its terms to make those deductions payable at that time and thereby to attract the priority which s 221P(2) envisages.
As part of the amendments to the Tax Act effected by the Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Act No 32 of 1993), s 221P of the Tax Act was amended by providing in subs (1A) that subs (1) did not apply to a deduction made by a group employer after 31 May 1993.
At the time of the deduction of tax instalments, the company became liable to pay the instalments so deducted to the DCT: s 221P(1); thus, even though the company had to pay the amounts so deducted during May 1993 by 7 June 1993 pursuant to s 221F(5)(a)(ii), those payments are in my view caught by the operation of s 221P generally as in force. Consequently, I reject the submission of the applicant that the payment payable by 7 June 1993 was not caught by the protection of s 221P as in operation until 31 May 1993. The statutory protection which s 221P of the Tax Act accords is therefore available in respect of the first six amounts outstanding for tax instalment deductions referred to above totalling $49,085.57.
However, I accept the applicant's general contention that the fact of a priority in respect of such payments granted by s 221P does not of itself mean that they could not be voidable payments under s 588FF. There is nothing in s 221P which indicates any legislative intention to exclude the operation of Part 5.7B of the Law, or its legislative ancestors, although it creates a priority in respect of funds available to the company, or to the liquidator of the company, or to a trustee in bankruptcy. The fact that s 221P(3) of the Tax Act, as then in force, recognises a limited priority for the application of available funds greater than the priority of the DCT also leads to the conclusion that voidable preferences under Part 5.7B of the Law are recoverable, and then should be accounted for in accordance with the statutory priorities, including the priority created by s 221P of the Tax Act to the extent it applies, rather than that no amount is recoverable under s 588FF of the Law because s 221P of the Tax Act creates certain priorities for the application of funds of a company or by a liquidator.
It was not submitted that, in any discretion I may have, I should not make an order with respect to those payments under s 588FF of the Law. There is no evidence relied upon to indicate that the superior priority which s 221P(3) preserves is capable of being met from other funds in the hands of the applicant. In the absence of any such information and any such submission, I do need to address that question further.
Finally, on this ground of defence, I note that it was submitted by the applicant briefly that the two payments made were payments to satisfy the compromise agreement, and therefore not payments to satisfy the liability which arose under s 221P of the Tax Act. I reject that submission. The compromise agreement related in part to that liability, and it compromised that liability to an extent but only in respect of late penalty payments. It was clear throughout the negotiations between Mr Nissen and the company and its advisers that the liability to pay tax instalment deductions and sales tax to the DCT as a primary liability would not be compromised, and it was not. I do not think it is appropriate in those circumstances to classify the payments made under the compromise agreement as not being payments made in respect of the taxation liability. The compromise agreement was not the source of the DCT's right to recover the sums paid, but the Tax Act and the Sales Tax Act. Nor could it, independently of those Acts, create an entitlement in the DCT to receive money if there were no statutory right to receive such money. It had the effect, as found in the earlier decision of this Court in Smith (supra), of obliging the DCT to accept payment of the taxation liabilities only pursuant to its terms while the compromise agreement was in force, but did not alter the character of the right to payment. In a practical way, that is also confirmed by the application of the two payments received by the DCT, firstly to pay outstanding tax instalment deductions and
ATC 4479secondly to pay sales tax outstanding and thirdly (the surplus of the payment received of $41,000) to pay late penalty payments imposed under s 221F(12) of the Tax Act. How else was the DCT to record such payments, if not for those purposes? In my judgment, the character of those payments as payments, to the relevant extent, of tax instalment deductions caught under the operation of s 221P is not destroyed by the compromise agreement.
Section 588FG, the Law
Section 588FG(3) expressly provides that payment towards discharging a liability to pay tax qualifies in the present circumstances as providing valuable consideration. Thus the requirement of s 588FG(2)(c) is made out. The critical matters as they arise on the material before me and which the DCT must prove, therefore, are:
- (1) that he became a party to each transaction in good faith, and
- (2) that at that time:
- (a) he had no reasonable grounds for suspecting that the company was insolvent, and
- (b) a reasonable person in his circumstances would have had no such grounds for so suspecting.
Ashley J in
Downey v Aira Pty Ltd (1996) 14 ACLC 1,068 at 1,074-1,076 discussed at some length the provisions of s 588FG(2) and the extent to which they differed from the regime which existed prior to Part 5.7B of the Law coming into force; the earlier relevant provision, by reference, was s 122 of the Bankruptcy Act 1966.
The expression ``good faith'' in s 122 of that Act, as explained in s 122(4), required that the creditor neither know nor have reason to suspect both insolvency and that the transaction resulted in that creditor receiving preferential treatment:
Queensland Bacon Pty Ltd v Rees (1965-1966) 115 CLR 266 at 303;
Re Chisum Services Pty Ltd (1982) 1 ACLC 292 at 297; (1982) 7 ACLR 641 at 648. The provisions of s 588FG(2)(d)(i) now reflect that objective assessment independently of good faith, so that, as Ashley J concluded in Downey (supra), the requirement of good faith in subs (2)(a) is now entirely subjective. ``Good faith'' is not otherwise defined, but I think that it encompasses the state of mind of the creditor as to whether the transaction is to occur in circumstances which will, or may, advantage the creditor over other creditors of the company, so that the state of awareness of the creditor as to the company's solvency will be directly relevant to that question.
My view on that issue is, I think, consistent with the conclusion of Ashley J. It accords with the legislative intent expressed in the explanatory statement supporting the Corporate Law Reform Act 1992 (Act 210 of 1992) which introduced Part 5.7B of the Law generally. The question so posed will accommodate circumstances where the transaction may not be in the ordinary course of business, previously a disqualifying condition of the protection afforded by s 122(2)(a) of the Bankruptcy Act but no longer explicitly so. And it is also consistent with the balancing of the interests of the creditor and other creditors of the company, as any state of mind of the creditor which involved that creditor perceiving that it was, or may be, being advantaged over other creditors by the transaction would not warrant the protection which the balancing of interests in s 588FG is apparently designed to reflect. Nathan J in Sands & McDougall (above, at ATC 5235-5236; ACLC 134-135) discussed the same question. His Honour considered ``as did Ashley J'' that good faith should be read according to its ordinary meaning and that is by acting honestly and with propriety. I do not think that formulation in context can mean less than acting without an expectation that the creditor is being preferred over other creditors. Honesty and propriety, in context and particularly bearing in mind the purpose of the section, would not exist simply because a creditor, knowing or suspecting that it was being preferred over other creditors by the payment, might nevertheless honestly think that that course of action was somehow a proper one.
The criteria for the respondent's protection under subs(2)(b)(i) and (ii) were also considered by Ashley J in Downey (supra). He remarked as to those sub-clauses as follows (at 1,076):
``I find it difficult, however, to see how a different result could obtain from the operation of sub-paragraphs (b)(i) and (ii). The question - has the creditor proved that he had no reasonable grounds for suspecting insolvency? - requires an objective consideration of the circumstances. Once
ATC 4480that is done, the answer to the question would seem to be `no' if, objectively, there were no reasonable grounds - regardless whether the creditor was a reasonable or a quite unreasonable person. If that be so, then sub-paragraph (b)(ii), though expressed conjunctively would seem to be otiose. What can at least be said is that sub- paragraph (b)(ii) makes it abundantly clear that proof of a negative - upon an objective consideration of the circumstances removed from the creditor (but not the creditor's circumstances) - is required before the creditor can make out a sub-section (2) defence.''
Nathan J in Sands & McDougall (supra) at ATC 5236; ACLC 135 suggested that there may be a subtle difference in that the reasonable person in sub-clause (ii) imports an objective test of what or who is such a person, and the next phrase ``in the person's circumstances'' imports a subjective element. He did not need to decide the issue.
It is noteworthy that that objective inquiry (or inquiries) is as to the suspicion of the company's solvency. Unlike s 122(4) of the Bankruptcy Act, it does not require suspicion as to the additional feature concerning the procuring of an advantage over other creditors by the transaction.
Kitto J in Rees (above, at 303) provided the following observation:
``A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to a `slight opinion, but without sufficient evidence', as Chambers's Dictionary expresses it.''
Of course, such a judgment must be made without the wisdom of hindsight and in all the circumstances which existed at the time. It may be necessary to address sub-clauses (i) and (ii) of subs (2)(b) separately. The question in each case is the same: Is it proved that the creditor had no reasonable grounds for suspecting that the company was insolvent at the time of the transaction? (It is not necessary to consider the alternative referred to in s 588FC(b).) The difference is only the perspective - it is either that of the creditor, or that of a reasonable person in the creditor's circumstances. Often, I think the relative perspective from which the question will be asked will be the same. In this case I consider that to be the case as there is no reason to think, nor any submission made, that either the DCT or Mr Nissen (if he reflects or for relevant purposes is, the creditor's state of mind) was not a reasonable person.
The DCT referred to two authorities which, it was submitted, threw light on the operation of s 588FG in the present circumstances, namely
Casatex Australia Pty Ltd (In Liquidation) v Deputy Commissioner of Taxation (Davies J, 9 December 1994, unreported), an application to recover from the DCT sales tax as a preference under s 565 of the Law as then in force and s 122 of the Bankruptcy Act 1966, and Sands & McDougall (supra), also involving an application to recover from the DCT sales tax alleged to have been paid as a preference in circumstances where unpaid sales tax was agreed to be paid in instalments. Those two decisions were also relevant to the defence arising in respect of the two statutory notices.
In Casatex (supra), Davies J concluded in favour of the DCT that the particular payments in question did not in the circumstances constitute preferences in any event. That refers to the fourth ground of defence referred to above, which is not pursued in this matter. Incidentally, in the course of his reasons, he observed that there may be a difference also between amounts paid to the DCT which were in respect of the preceding or recent periods, and those paid in respect of longer periods of default, perhaps based on the ``running account'' defence: s 588FA(2). The DCT did not seek to make any such point of distinction in the present matter, so I do not need to further address that. He also decided that the defence available under s 122 of the Bankruptcy Act 1966 was made out on the particular facts, as the DCT through his officers had good reason to believe that the staged payment of arrears of sales tax would not be such as to give the DCT a preference, in effect because all creditors of the company were participating in the same way, and that ultimately all would thereby be paid. It was specifically found that the taxation officers at the time were aware that Casatex was unable to pay its debts as they fell due. I do not think that decision assists in resolution of the present issue. It was under the previous legislative regime, and although it may assist on the ``good faith'' test under s 588FG(2)(a), the finding as to the taxation officer's awareness of Casatex's insolvency would mean now that the
ATC 4481objective tests under s 588FG(2)(b) on that topic would not be satisfied. As I have pointed out, that is one of the significant changes from the earlier statutory regime.
In Sands & McDougall (supra), Nathan J also decided that sales tax payments cannot be unfair preferences under s 588FA of the Act. It is unnecessary to address that issue further because, as appears above, the DCT does not put the same submission to this Court. On the question of whether, assuming to the contrary of his primary conclusion, the respondent was protected by s 588FG of the Law, Nathan J at ATC 5235-5238; ACLC 134-137 concluded that neither the DCT nor anyone else in the DCT's position would have had reasonable grounds, or indeed any grounds at all, for suspecting the company was insolvent. That is of course simply a conclusion of fact. It is unprofitable to endeavour to draw from one set of facts any analogy with another set of facts so as to reach a conclusion of law. Consequently I do not see that that case lays down any matter of principle on this aspect which directs the resolution of what is essentially a question of fact before me, albeit a complex one, from all the evidence.
It is to the evidence that I now turn.
For the DCT evidence was led from Darren Scott Nissen (``Mr Nissen'') a taxation officer employed by the DCT. He gave his evidence both through affidavit and cross-examination. Subject to my findings below as to the terms of the telephone conversation which took place between him and Graham William Hobbs (``Mr Hobbs'') on 27 October 1994, I rely on and accept his evidence. I have no hesitation in finding that he was endeavouring at all times to be truthful. The only other oral evidence before me was that of Mr Hobbs, again by affidavit and cross-examination. As appears from the background discussion, he was the solicitor from Kelly & Co engaged by the company to advise it about the sale or proposed sale of its business and assets, and in that capacity had certain dealings with the DCT through Mr Nissen. I have no hesitation also in accepting him as a truthful witness, and generally accepting his evidence. It will be necessary to make specific findings as to the conversation of 27 October 1994, but otherwise there is no issue between Mr Hobbs and Mr Nissen on any significant factual matter. I have also had regard to the extensive agreed documentary material tendered before me. The other affidavit evidence tendered does not go to this particular question.
The outstanding liability of the company to pay to the DCT tax instalment deductions and sales tax from time to time was the subject of discussions between the company and officers of the DCT as far back as February 1992 and during 1993 and 1994. Certain financial data, including projections, were provided to the DCT by the company on occasions to demonstrate its potential cash flow, and during 1994 to illustrate its attempts to refinance to ensure payment of the tax arrears outstanding and in an endeavour to forestall the DCT from taking enforcement action. It is unnecessary to deal with the picture in any detail until 1994.
The company during the 1993/1994 financial year made barely any payments to the respondent in respect of tax instalment deductions made by it, and through the cross respondent Nigel Bounds (``Mr Bounds''), one of the directors, it sought to keep the DCT from taking precipitate recovery action. Its letter to the DCT of 14 February 1994 presented a promise to pay the June to August 1993 tax instalment deductions progressively by 31 March 1994, presumably from its operations, and asserted confidence (supported by a letter from its accountants) that by 31 March 1994 the company would have refinanced its operations by borrowing twenty million dollars. None of those things happened. Accompanying that letter were what appear to be some pages of a business plan for the company, including a profit and loss statement for the period to 30 June 1993, which showed the company to have traded profitably for that year, and a balance sheet to 30 June 1993, which showed that at the end of that financial year it had net assets of $121,444. On 6 April 1994 Mr Bounds told Mr Nissen that the application for the refinancing package would be decided on 8 April 1994, and if granted would enable all creditors to be paid in full. That did not happen. Mr Nissen, having heard nothing further, contacted Mr Bounds on 17 May 1994 and was told that the refinancing package of twenty million dollars had been approved so that the DCT would be fully paid including all arrears by 7 June 1994. That did not happen. On 7 June 1994 Mr Bounds contacted the DCT to inform him of a delay, and that payment would be made within fourteen days. That did not happen. On about 8
ATC 4482June 1994, two statutory demands under s 459E(2) of the Law were served on the company in respect of certain outstanding tax instalment deductions and sales tax. The failure to comply with those notices within twenty one days rendered the company vulnerable to be wound up for insolvency. They were not complied with. On 29 June 1994, the company wrote to the DCT seeking a further thirty day extension, on the grounds firstly that the refinancing package was expected to be available by 28 August 1994 and secondly that the company was seeking a new equity ``partner'' as an interim measure so as to pay the DCT in full by 1 August 1994. Not surprisingly, Mr Nissen was somewhat cautious; he could not see how a company capable of borrowing twenty million dollars and servicing that loan, especially as the interest would be some $166,000 per month, could be in a position of being unable to pay the DCT's debt in full, or at least to pay the tax instalment deductions of some $8,000 per month. The company had not paid such monies at all in respect of any month since November 1993. He was referred to the company's accountant who told him that:
``[The financier looks] at the Company's future business plan and cash flows together with minimal security and make[s] a decision on that... [T]he security will be 2 million dollars of the 20 million [to be] invested in the National Bank Treasury Department. He advised that over the last 15 years the interest rates have averaged 16% and therefore the 2 million dollars invested over ten years after tax, will amount to 20 million dollars and therefore the loan will be paid and the company only has the interest to pay each month and that is covered in its future business plan and cash flows. [The accountant] further advised that 2 equity partners are very keen to be involved and if they accept, the funds they contribute will more than clear our debt.''
I do not presently comment on that response, except to observe that in so far as it is said to explain why the company could not pay the tax instalment deductions of about $8,000 per month regularly, but would be able to pay interest of $166,000 per month, it is not readily apparent why that is so. Nevertheless, that request was accommodated and the further indulgence sought was formally recorded.
On 15 July 1994 a payment agreement was entered into between the company and the DCT relating to the outstanding tax instalment deductions which had become due during the financial year ended 30 June 1994. An extension of time to pay in respect of the instalments outstanding prior to that date, and for the arrears of sales tax was also granted. It was acknowledged in that agreement that the company was indebted to the DCT in respect of the then tax instalment deductions made by the company for the period July 1993 to June 1994 in the sum of $99,693.02. That amount was to be repaid on 1 August 1994, but that did not happen.
Following default under that agreement, and the request for further time to pay, the DCT by letter of 15 August 1994 indicated to the company's accountants that the total then unpaid was $271,267.27. It demanded payment by 1 September 1994, that extension being said to be ``the last'' and that non payment then would result in the commencement of the winding up of the company as well as recovery action against the directors personally. With that letter was provided a statement of account for the company as at 15 August 1994 showing, and asserting, each of the amounts for tax instalment deductions and for sales tax up to that date as having been debited to the company from time to time and as having remained outstanding, subject to credits for certain payments made spasmodically by the company.
Payment was not made on 1 September 1994. The DCT then gave to the company notice of its intention to apply to wind up the company and later served further statutory notices of demand pursuant to s 459E of the Law on 4 October 1994. The company, through its accountants, urged the DCT not to take such action because the company was imminently to dispose of its business and assets, and that such action on the part of the DCT would jeopardise the proposed sale to the detriment of the company and its creditors generally and including the DCT. Discussions along those lines became somewhat more prolonged than had been anticipated. On 21 September 1994, Mr Nissen recommended to Mr Ford, a Debt Collection Manager of the DCT, that in view of the ``very long and appalling payment history'' of the company, firstly no further time to pay the debt should be given and secondly winding up procedures should be commenced against it as
ATC 4483soon as possible. That recommendation coincided with the receipt by the DCT of a letter from the company's accountants dated 20 September 1994, again urging the withholding of winding up action while the company or its business was sold. As a result, the respondent through Mr Ford decided to allow some further time to pay to the company. On 23 September 1996 the DCT sought certain steps to be taken by the company and its directors including provision of detailed information, failing which the DCT indicated his intention to pursue winding up procedures against the company without further notice. It appears that it was following that letter that the company engaged Kelly & Co to advise it.
Mr Hobbs discussed the company's position with Mr Nissen on 5 October 1994. As a consequence, the DCT formed the view that Kelly & Co would in the proximate future receive into its trust account monies of the company from the sale of its business and assets. Accordingly, notice was given to Kelly & Co pursuant to s 218 of the Tax Act that it sought to recover from Kelly & Co $230,877.86 due by the company to the DCT in respect of tax instalment deductions and notice pursuant to s 74 of the Sales Tax Act to recover from Kelly & Co $39,175.20 due by the company to the DCT in respect of Sales Tax.
There was still no cogent progress to payment. On 12 October 1994 the DCT wrote to Kelly & Co giving notice of intention to proceed with the issue of a winding up summons as soon as possible and without further notice, following service of two further statutory demands for payment pursuant to s 459E of the Law on 4 October 1994. Those notices were not complied with. Thus, putting aside the effect of earlier demands under s 459E, by 27 October 1994 the DCT was in a position to apply to the Court under s 459C of the Law to wind up the company, and by reason of s 459C(2)(a) on such an application the Court would have to presume that the company was insolvent, unless the contrary were proved.
A meeting was then arranged between Mr Nissen and Mr Hobbs for 26 October 1994.
Up to this point, although the DCT was obviously concerned that both the tax instalment deductions and sales tax payments had not been made to it, to the point where it had positioned itself to be able to apply forthwith for the winding up of the company, the information provided to it especially if it accepted the comments of the company's accountants was not of itself indicative of insolvency, although that was of course one possible conclusion able to be drawn from the history of events. That is particularly so in the absence of further figures showing the company's performance subsequent to 30 June 1993, its repeated failure to meet promises, its apparently unsuccessful attempts to procure further funding or a refinancing package, or further equity investments, and its failure to respond to statutory notices of demand served upon it from time to time, even in the face of the consequence of deemed insolvency, and in the knowledge (as it was asserted to the company from time to time by Mr Nissen) that the directors would be personally liable for any shortfall. Although one can sympathise with the DCT and his officers in handling a difficult account, such as this obviously was, one cannot help but have a suspicion that the reason that the payment was not made under such prolonged and insistent pressure, was simply the inability to make the payments. I accept the view, expressed also in other cases, that the DCT and his officers cannot be expected to second guess the company, its accountants, or its legal advisers, where solvency, or financial information asserting and establishing solvency, is presented from time to time. It will be appropriate, subject to the exigencies of particular circumstances, for the DCT and his officers to act upon and to accept such information generally speaking. Here, however, there was reason to suspect otherwise given the history I have outlined above. One could legitimately ask why the payments had not been made. The period outstanding does not support the suggestion simply of an immediate short term cash flow problem. It suggests something much more permanent.
In his evidence, Mr Nissen said that, up to the time of the meeting on 26 October 1994, he had been told by both accountants and solicitors for the company that it was solvent. That is not entirely correct. No assurances or assertions of solvency had been made in explicit terms by the company's legal advisers. The only relevant communication from Kelly & Co to the DCT to then was a letter of 26 September 1994 requesting the DCT not to proceed further with collection action whilst the attempt to sell the
ATC 4484business and assets of the company was ongoing. It added:
``It is in the interest of all creditors including your office that our client be given a reasonable opportunity to sell the business assets at their full market value.''
As to that paragraph, Mr Nissen in his evidence said that he took that to mean that as a result of the proposed settlement all creditors would be paid in full. He acknowledged that the letter does not say that, but ``that's what I took the letter to believe''(sic) to be saying.
However, it is not necessary to finally decide that issue as, towards the end of October 1994, the picture available to the DCT through Mr Nissen changed and the focus became much more specific.
At the meeting on 26 October 1994 between Mr Hobbs and another solicitor from Kelly & Co and Mr Nissen, negotiations took place with a view to compromising the DCT's claim. Mr Nissen was provided with a document headed ``Profit and Loss - 31/10/94'' which appears to be an unaudited balance sheet, and which demonstrates a shortfall of assets against liabilities in the order of some $300,000. Mr Hobbs at that time had the view that the company was insolvent; I note that because his view was explored by counsel for the DCT in cross-examination of Mr Hobbs with a view to procuring evidence from which it could be argued that if the company and its professional advisers thought that the company was solvent, then it was not for the DCT to second guess that view, assuming that such view was communicated and that it was cogent. That view was not in fact communicated by Mr Hobbs to Mr Nissen. Upon seeing that document, Mr Nissen also concluded that the company was not in the position to pay all its creditors in full so that, following the sale of its business, on the figures then indicated there would be a shortfall left which would result in some creditors not being paid in full. That position was confirmed at the meeting in oral discussions, when Mr Hobbs explored compromise of the DCT claim at a considerably lower figure than the amount involved, initially at $50,000 only. The letter from Kelly & Co following the meeting dated 26 October 1994 confirmed, on the basis of the discussion and the document presented, that there would be a shortfall after the sale. The meeting of 26 October 1994 ended on the basis that Mr Nissen would revert to Kelly & Co to indicate what figure the DCT would accept in settlement of his claims. Mr Nissen then consulted Mr Ford and Ms MacWhirter from the DCT's Complex Legal Recovery Unit. As a result, the DCT through those officers decided to propose that the DCT would agree to accept $250,000 from the company in settlement of its outstanding tax liabilities and including penalties, which decision involved some remittal of late payment penalties. Mr Nissen telephoned Kelly & Co to put that proposal.
Prior to the making of the offer of $250,000, and following his discussions with Mr Ford and Ms MacWhirter, Mr Nissen had made a calculation from the figures in the ``Profit and Loss - 31/10/94'' document. It showed a shortfall of assets against liabilities of $305,653. He then adjusted the shortfall by taking off $57,000 representing the difference between the DCT's then debt and its offer to accept $250,000 and by taking off $73,250 representing the loans given by related companies. The shortfall then was $175,403. He also adjusted the liabilities in the same way.
Thus total liabilities of $1,829,156 were reduced by $57,000, and by the loans given by related entities of $73,250, so that the amended liabilities were $1,698,906. He then calculated an across the board 10% reduction of the adjusted liabilities as $169,890. This amount was approximately equal to the amended shortfall. On that basis, he formed the positive view, provided the creditors all agreed to a 10% cut in their claims, that the company would, at settlement, pay all of its creditors out.
On 27 October 1994, Mr Hobbs contacted Mr Nissen. He told him that he had ``discussions today with the other creditors, particularly the secured creditors'' (Mr Nissen's contemporaneous note) and that the other creditors were prepared to accept 90% only of their debts. Mr Nissen's evidence is that he was told by Mr Hobbs that all creditors had been spoken to, and had agreed to discount their claims against the company by 10% for the purposes of payment from the proceeds of sale of the business in terms of the compromise agreement. Mr Hobbs disputes that version of the conversation. His evidence is that, whilst he does not recall the conversation specifically, he in fact spoke only to two of the secured creditors and to none of the unsecured creditors, and that he would not have misled Mr Nissen. It
ATC 4485is not possible that he said that he had spoken to all the creditors. As I have indicated, I accept both Mr Nissen and Mr Hobbs as witnesses of truth. Their versions of that telephone conversation differ and I accept that Mr Nissen came away from it with the view that Mr Hobbs had confirmed for him the assumption upon which he had done that calculation. I also accept that Mr Hobbs would not deliberately have misled him on that topic, and that he did not do so. It is a situation where the focus of each of those persons was obviously somewhat different. Mr Hobbs may have chosen his words more carefully had he realised fully the import of Mr Nissen's focus, and on the other hand Mr Nissen may have drawn rather more from the words that Mr Hobbs used than was intended, and was perhaps fully conveyed. Mr Nissen's own note does not suggest an emphasis on Mr Hobbs having spoken to all creditors, and on all creditors having agreed to a 10% discount on their claims as he suggests.
In any event, for reasons which appear below, the precise conversation, or what was drawn from it, is not critical to my determination of all of the grounds necessary to be proven under s 588FG(2) of the Law. I shall refer to that again shortly after completing the recording of my findings of the historical events.
No final arrangement was then reached. The question of further tax instalment deductions and sales tax becoming payable in November 1994 from the company's trading showing October 1994 was first then raised, and Mr Hobbs was to consider that matter.
On 28 October 1994, Mr Hobbs again contacted Mr Nissen, and after discussion the compromise agreement was reached. Mr Nissen asked to be advised of the time and place for settlement so that he could attend and collect the cheque for $194,000 to be payable to the DCT. From the DCT's point of view, that represented recovery of all the unpaid tax instalment deductions, all the sales tax payable, and a small amount of penalties of about $12,000 for late payment penalties under the Tax Act. It was not proposed then to seek to recover the balance of penalties payable, although the offer and its acceptance was conditional upon the payment of the monies in question.
Kelly & Co then wrote to the DCT recording the agreement by letter of 31 October 1994 in the following terms:
``1. Your office shall accept the total sum of $235,000.00 in full satisfaction of unpaid tax instalment deductions, sales tax and penalties which amount shall include any amounts to become payable in respect of the month of October 1994.
2. The said sum shall be paid as follows:
- 2.1 $194,000.00 on the date of settlement of the sale of the business by (the company);
- 2.2 As to the sum of $41,000.00 on the 15th day of December 1994.
3. In consideration of the above payments your company (sic) will fully release (the company) and its directors from any further liability in respect of the said unpaid instalment deductions, sales tax and penalties.''
That agreement, subject to slight correction, was confirmed by letter from the DCT dated 2 November 1994. In particular, it was confirmed that it was subject to the October 1994 tax instalment deductions due on 7 November 1994 and the October 1994 sales tax due on 21 November 1994 not exceeding $13,500, so that any amount by which those amounts exceeded that sum would be an additional payment. That excess was in fact $1,547.25. The letter from the DCT continued:
``Providing (the DCT) is paid according to the contents of this letter, no further action will be taken by this office in respect to collection of the balance of the unpaid amounts owed by the company. In addition, if the above amounts are paid, the penalties incurred by all the company directors for breaching an agreement made with this office under section 222ALA of the Income Tax Assessment Act 1936 will be extinguished.''
Kelly & Co then set about arranging settlement of the sale of the company's business and assets. It prepared both the purchaser's settlement statement and the vendor's settlement statement. The amount payable at settlement was requested to be paid by a series of six bank cheques including one for $194,000 payable to the DCT. Other payments were directed to the secured creditors, to one other unsecured creditor, and for legal fees to the
ATC 4486company's solicitors. An adjustment was made for long service leave entitlements payable by the company, as one of its liabilities, and a responsibility taken over by the purchaser, by deducting that amount from the purchase price actually paid by the six bank cheques. There was no balance payable to the company from the settlement sum. Settlement took place at the office of the purchaser's solicitors. It took place on 3 November 1994. At settlement, a solicitor at Kelly & Co, Ms Arnold, attended. The purchaser handed over bank cheques as requested, including that payable to the DCT, to Ms Arnold and she in turn handed that cheque to Mr Nissen on behalf of the DCT. He was present at the settlement for no more than several minutes.
Payment of the $41,000 was not made on 15 December 1994. Mr Nissen chased up the payment, unsuccessfully, so on 10 January 1995 the DCT wrote to Kelly & Co indicating that it was considering commencing legal action to collect the unpaid amounts owed by the company. Further communications both with Kelly & Co and with Mr Bounds for the company resulted in the DCT on 6 February 1995 receiving both the $41,000, and information from Mr Bounds sufficient to quantify both the tax instalment deductions and the sales tax liability of the company for October 1994. That enabled the quantification of the additional amount owing under the compromise agreement at $1,547.25. That small amount was still owing at the time the applicant was appointed liquidator of the company.
Although it is not clear on the evidence, it appears that the proceeds of the sale of the stock of the company were got in by the company itself, rather than by Kelly & Co, and the payment of $41,000 was arranged by the company itself. The DCT, and in particular Mr Nissen, did not receive any further information relating to the financial position of the company between 3 November 1994 and the date of the receipt of the $41,000, or indeed until the appointment of the applicant as administrator of the company on 5 April 1995. Mr Nissen was then surprised and shocked to learn that a number of creditors of the company had not been paid from the proceeds of sale of the business and of the stock. He had believed to that time that there would be no unpaid creditors following payment of the purchase price for the business and the recovery of the sale proceeds for the stock of the company. There is certainly no information which justifies a different conclusion being reached in respect of his state of mind at the time of the payment on 3 November 1994 of $194,000 or the time of the payment received on 6 February 1995 of $41,000.
As I have said, I accept Mr Nissen as a witness of truth. Consequently, his subjective belief as described leads to the conclusion that the DCT did receive each of the payments in good faith. It does not matter for that conclusion whether the general test of ``honestly and with propriety'' or the more specific formulation I have referred to is applied. He in fact did calculations which positively led him to that belief.
The applicant submitted that I should not treat his belief as the belief of the DCT himself. That was not for any reason connected with the person of the DCT, as both the applicant and the DCT adopted the common position that the officers of the DCT involved in the making of the decision were, for relevant purposes, the mind of the DCT. It was submitted, however, that the applicant had failed to call either Mr Ford or Ms MacWhirter, who were superiors of Mr Nissen and persons with whom he consulted before the compromise agreement was arrived at. In the absence of their evidence, it was submitted, I should infer that their evidence would not be helpful to the DCT on this score, and should also conclude that Mr Nissen's state of mind does not fairly reflect the relevant state of mind of the DCT. I reject that submission. I have had regard to the role of Mr Nissen generally in the conduct of this file, and to the limited role of Mr Ford and Ms MacWhirter. Whilst each of them played a part in the final decision process, their role was limited to participating in that decision on the basis of information conveyed to them by Mr Nissen rather than on any direct participation in the conduct of the file or in the negotiations. Because the role of each of them was, in that context, limited I do not think it appropriate to conclude that it was other than Mr Nissen who, for the purposes of the ``good faith'' requirement, was the relevant state of mind of the DCT.
I turn to the objective test to be satisfied under s 588FG(2)(b) of the Law.
In my view, although it is not directly to the point given the changed picture as at late
ATC 4487October 1994, up to that time the DCT would not discharge the onus of proving that either he, through Mr Nissen, or a reasonable person (for reasons given above I equate those two in the particular circumstances) had no reasonable grounds for suspecting that the company was insolvent. There had been prolonged delays in payment, failure to comply with the statutory demands with the consequence of deemed insolvency over a number of years including such demands on 8 June 1994 and 4 October 1994 served on it, and including the context where its directors potentially were personally liable if the company did not meet the liabilities to the DCT. The only tax instalment deduction paid during the 1993/94 financial year was for November 1993. No payment of the substantial arrears had been made to reduce the arrears since March 1993. The offers of finance which had been mooted had not come to pass. The attempts to procure an equity partner had not come to pass. It was clear, judged objectively, that somehow additional funds were needed for the company's operations to enable it to continue to trade and to meet its liabilities as and when they fell due. There is no basis, given the persistent non payment and the apparent inability under such pressure to meet payment to the DCT, to think that the projected performance was happening. Indeed, the proposal to sell the company or its entire business and assets, which was to the fore during August 1994 and subsequently, does not provide any basis for thinking that the company's trading position had improved sufficiently to enable it over time to meet its outstanding or recurrent debts and liabilities as and when they fell due. The signs were clearly of a company in crisis.
However, the picture changed by 31 October 1994 when the compromise agreement was entered into and that changed picture then persisted at the time of the two payments. The change was that the company was to cease trading and had sold its business and assets. Funds from the sale of its business and assets were to be available in the proximate future, and in fact did so become available. The measure of solvency at that point was clearly whether the funds from the sale of its business, which would lead to the company ceasing to trade from that time, would become available in the near future (as they did) and whether they would be sufficient to meet the current liabilities then outstanding of the company. Although the document entitled ``Profit and Loss - 31/10/94'' indicated that there would be a shortfall, subsequently both the DCT and Mr Nissen understood that some or all other creditors had reduced their claims so as to enable creditors to be paid in full. That is a reflection of my finding as to good faith. It is, however, quite a different question as to whether there were at the time, judged objectively but in the circumstances of the DCT, no reasonable grounds for suspecting that the company was insolvent.
That matter, involving the proof of a negative, is a different issue from the DCT establishing that he had reasonable grounds, or that a reasonable person in his position, had reasonable grounds for suspecting that the company was solvent. In my view, that is the process upon which Mr Nissen embarked. His calculations, based upon the information he understood he had received, disclosed that. It was reasonable for him to have understood from the conversation with Mr Hobbs that, in general, the creditors of the company had discounted their claims by 10%. Accordingly, were that the question, I would find the defence made out. But it is not the question. It is necessary for the DCT to prove the negative: that he, or a reasonable person in his circumstances, had no reasonable grounds for suspecting that the company was insolvent at that time. That is a substantial task. Given that a company in crisis had disposed of all its assets including its business, and was in the process of being paid for that sale, is it shown that he, or a reasonable person in his circumstances, had no reasonable grounds for suspecting that all creditors would not be paid in full. Mr Nissen's calculations show that it was a pretty tight run thing. It is implicit in his calculations that the assets would all realise the amounts estimated, in particular $100,000 for sale of stock, $220,000 for recovery of debtors, and $30,000 for outstanding equipment sales. I do not think that it is unreasonable at that time to consider that the assets may not realise the amounts ascribed to them. Any significant shortfall, given the tightness of the calculations in any event made by Mr Nissen, would have an impact on the solvency of the company. There is no evidence to indicate that, in particular, the debtor's figure of $220,000 was arrived at by any process of discounting for aged debtors, or
ATC 4488that there was any foundation laid for it being a realistic figure as distinct from a figure simply from the list of accounts. It was not a figure which was verified in any formal way. In addition, I think it was not unreasonable to contemplate that certain of the liabilities in any event would not be discounted by 10%, in particular as shown on the document entitled ``Profit & Loss - 31/10/94'' the amounts of $137,423 described as ``Wages - LSL & A/ Leave (as per schedule)'' and of $50,000 described as ``Super/Work Cover/Pay Tax'' and of $10,000 described as ``Unpresented Cheques''. No schedule as referred to appears in evidence. In my view, the DCT, and a reasonable person, could each anticipate that such amounts might not or would not be discounted because of statutory priorities or other reasons. The settlement statement discloses that an amount for long service leave was retained by the purchaser precisely to meet that ongoing liability. Those amounts were included in the liabilities discounted by 10% by Mr Nissen, but in my view it is reasonable for the DCT to have looked at those figures and to have considered that they may not in fact be discounted. Again given the tightness of the calculations made by Mr Nissen, a difference derived from those calculations is material. It is my judgment that, on those two topics, each provides a reasonable ground for the DCT and Mr Nissen, or a reasonable person in the DCT's circumstances, for suspecting that the sale of the company would not or might not result in the payment of all its creditors in a timely fashion, and that there would be a shortfall despite those sale proceeds.
I have taken into account the submission put on behalf of the DCT that it is not for the DCT or his officers to second guess professional advice. Nor should the DCT or his officers be expected to apply a crystal ball or indeed an audit process to a company's affairs, where that has not been done by the company or its officers. On the other hand, in the particular circumstances, the DCT had a very substantial debt owed to it, and a level of resources or experience to make some more than merely cursory analysis of material provided. It is appropriate to assume that the statutory priorities protecting employees' wages were known to him. It is appropriate, too, to conclude that he, or a reasonable person in his circumstances, would have sufficient knowledge to be able to look at such figures as were provided and to form some view as to how exact or ``tight'' they were. Whilst I have concluded that Mr Nissen, and hence the DCT, did have reasonable grounds for thinking that the company was solvent in the relevant sense following the sale of its business and assets and the compromise of its liabilities in a general way, I am unable to conclude that he has proved that he had no reasonable grounds for suspecting that the company was insolvent at the time of each of the payments.
Accordingly, I do not think that that defence has been made out.
The statutory notices
The DCT puts two separate propositions based on the statutory notices:
- • firstly, that the two statutory notices, each given on 5 October 1994, had the effect that the debt ``due to the company from the solicitors'' came into existence at the settlement on or about 3 November 1994 when it is said the settlement funds came into the hands of Kelly & Co so that then ``the debt was to the relevant extent bound by'' the notices; in effect, it is said, the payments were not made by the company but by the solicitors; and
- • second, that the effect of the statutory notices was to convert the DCT to the status of a secured creditor (presumably of the company), either because the notices effected an assignment of the debt owed to the company to a debt owed to the DCT, or alternatively because the statutory notices created a statutory charge over the debt owed to the company, so that there could therefore be no preferential payment under s 588FA of the Law in respect of the two payments because s 588FA on its terms applies only to payments to an unsecured creditor.
In the case of each submission, it is necessary for the DCT to establish the existence of a fund of money held by Kelly & Co for or on account of the company to which the statutory notices or their operation attached at a material time. As no notices were given to the purchaser, although it became indebted to the company at settlement or perhaps earlier when the agreement for the sale and purchase of the company's business was made, it was not submitted that the statutory notices could
ATC 4489operate in respect of any monetary corpus other than that which was, in the relevant sense and at a material time, held by Kelly & Co. Reliance was placed particularly upon the decisions in
Clyne & Anor v DFC of T 81 ATC 4429; (1981) 150 CLR 1,
DFC of T v Donnelly & Ors 89 ATC 5071; (1989) 25 FCR 432 and
Norgard & Ors v DFC of T & Anor; DFC of T v Norgard & Ors 86 ATC 4947; (1987) 5 ACLC 527.
It is convenient, in addressing those two arguments, to note the terms both of the sections under which the notices were given, and of the notices themselves. Section 218 of the Tax Act relevantly provides:
``218(1) The Commissioner may at any time, or from time to time, by notice in writing... require
- (b) any person who holds or may subsequently hold money for or on account of a taxpayer;
to pay to the Commissioner, either forthwith upon the money becoming due or being held, or at or within a time specified in the notice...
- (e) so much of the money as is sufficient to pay the amount due by the taxpayer in respect of tax or, if the amount of the money is equal to or less than the amount due by the taxpayer in respect of tax, the amount of the money; or
- (f) such amount as is specified in the notice out of each payment that the person so notified becomes liable from time to time to make to the taxpayer until the amount due by the taxpayer in respect of tax is satisfied;
and may at any time, or from time to time, amend or revoke any such notice, or extend the time for making any payment in pursuance of the notice.
(4) Any person making any payment in pursuance of this section shall be deemed to have been acting under the authority of the taxpayer and of all other persons concerned and is hereby indemnified in respect of such payment.''
As the High Court observed in Clyne (above), the obligation on the recipient of the notice to comply with it is not express, but it is a clear and necessary implication from the terms of the section. There are express criminal sanctions for failure to comply with a notice.
Section 74 of the Sales Tax Act is in slightly different terms. It relevantly provides:
``74(1) This section allows the Commissioner to collect money from a person who owes money to a taxpayer who has a sales tax debt.
(2) The Commissioner may direct a person (`the third party') who owes, or may later owe, money (`the available money') to the taxpayer to pay some or all of the available money to the Commissioner in accordance with the direction...
(4) The third party must comply with the direction, so far as the third party is able to do so.
(6) Any payment made by the third party under this section is taken to have been made with the authority of the taxpayer and of all other persons concerned, and the third party is indemnified for the payment.
(8) The third party is taken to owe money to the taxpayer if:
- (b) the third party holds money for or on account of the taxpayer;
The obligation to comply with the notice is express. Unlike s 218 of the Tax Act, under which (for present purposes) the solicitors are said to be persons who ``hold or may subsequently hold money for or on account of'' the company so as to be caught by the operation of a valid notice under s 218 of the Tax Act, the persons to whom a notice may be given under s 74 of the Sales Tax Act are persons who owe, or may later owe, money to the company and collection is permitted only from a person who owes money to the company. However subs (8)(b) of s 74, by expressing the circumstances in which a person is taken to owe money to a taxpayer, in my view means that there is no material difference between the two sections.
ATC 4490No material difference was identified in submissions.
The statutory notices each dated 5 October 1994 were in identical terms, save for expressing their different statutory bases and penalties and the different amounts payable under the Tax Act and Sales Tax Act. The notice to Kelly & Co under s 218 of the Tax Act relevantly provided:
``TAKE NOTICE that, in the exercise of the powers conferred upon me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation pursuant to section 8 of the Taxation Administration Act 1953, I DO BY THIS NOTICE REQUIRE you being a person who:
- 1. holds; or
- 2. may subsequently hold
money for or on account of Adelaide Industrial Equipment Pty Ltd (hereinafter referred to as `the taxpayer') now or previously of, Stock Road, CAVAN 5094, a taxpayer by whom the amount of $230,887.86 is due in respect of tax, TO PAY TO THE COMMISSIONER-
- 3. where the amount of the money held or which may subsequently be held is greater than the amount of $230,887.86 due by the taxpayer - so much of the money as is sufficient to pay the amount of $230,887.86 due by the taxpayer;
- 4. where the amount of the money held or which may subsequently be held is equal to or less than the amount of $230,887.86 due by the taxpayer - the amount of the money; or
- 5. where you become liable from time to time to make payments of money to the taxpayer - an amount of 100 cents in every dollar of each payment until the amount of $230,887.86 due by the taxpayer is satisfied.
Payment to the Commissioner is REQUIRED-
- (a) where any money is being held - forthwith following receipt of this notice; or
- (b) where any money may subsequently be held - forthwith on the money being held.''
The notice under s 74 of the Sales Tax Act referred to the amount of $39,175.20. The statutory notices are therefore explicitly premised upon Kelly & Co either at the time of the statutory notices or subsequently at a material time up to and including the settlement of the sale of the company's business holding moneys for or on account of the company. In their terms, the statutory notices specify ``holding'' as the relevant fact in respect of Kelly & Co. The notices do not allow for argument based upon some other alleged status on the part of Kelly & Co deriving from subs (1)(a) or (d), or from holding money on account of some other person for payment to the company under subs (1)(c) of s 218 of the Tax Act, or upon the similar expressions in subs (8) of s 74 of the Sales Tax Act.
I therefore turn to consider whether, at or by the settlement of the sale of the company's business, the amount payable of $1.150 million, or at least the bank cheque for $194,000 drawn in favour of the DCT, was at or by the settlement held by Kelly & Co for or on account of the company. If it was not, then the notices did not come into play.
Initially, no other circumstance than the events at settlement was suggested as giving rise to Kelly & Co holding money for or on account of the company and so in effect, at that point, either holding money otherwise owing to the company as owing to the DCT or as holding money owing to the company but subject to a secured statutory charge over it. If that factual finding is made, then the DCT for the first leg of his argument based on the statutory notices must also support the proposition that the payment of $194,000 was made by Kelly & Co, and that such payment was not a ``payment made by the company'' so as not to constitute a ``transaction'' as defined in s 9 of the Law, whereby the DCT received from the company the preferential payment complained of. It was also submitted in the course of argument that by requesting the settlement sum to be paid as it was, by a series of bank cheques, Kelly & Co thereby at the point of the request ``held'' the settlement monies for or on behalf of the company.
There is, I was told, no authority directly in support of the submission, in particular as to whether in the circumstances Kelly & Co at any material time held money for or on behalf of the company, or indeed at all. I have referred above
ATC 4491to the circumstances leading up to, and at, settlement. The procedure adopted is a common one for commercial settlements. There is no suggestion that Kelly & Co, in requesting bank cheques directly to the proposed payees (including $194,000 to the DCT, pursuant to the compromise agreement) acted other than in accordance with, or for any reason other than, normal commercial procedures.
In my view, Kelly & Co did not at settlement in the relevant sense ``hold'' $194,000 to be paid to the DCT, or indeed any of the $1.150 million (perhaps other than $5,000 payable to itself), for or on account of the company.
There is nothing in the legislation to indicate that the expression ``holds or may subsequently hold'' money is used in a special way or as a term of art in those sections, so I start with the proposition that it should be construed in its ordinary English meaning but of course in its context. It is the way in which the sections are intended to operate which, in my view, illustrates when the recipient of a notice will ``hold'' money so that a notice is activated. Both sections contemplate a notice which, once it operates, will cause the application of moneys held by a person due or becoming due to a taxpayer in a specific way, but which otherwise would be paid to or applied in accordance with the taxpayer's instructions. They each therefore carry with them the sense of holding or possession of the money with the practical power (but for the notice) to effect the disposition or application of the money to the taxpayer or in accordance with the taxpayer's instructions. Each also contemplates, given the penalty for non-compliance, the holding of money in circumstances where the holder might dispose of it other than in accordance with the notice. That view is also reinforced by s 218(4) of the Tax Act and s 74(6) of the Sales Tax Act.
I do not think that the three authorities referred to help on this question.
In Clyne (above), a notice under s 218 of the Tax Act was served on a bank which, at that time, physically held moneys of the taxpayer on fixed interest deposits, although the moneys so held were not payable to the taxpayer or at his direction until the deposits matured. Before the deposits matured, but after the bank was served with the notices, the taxpayer by deed assigned the deposits to a third party as security for future advances to be made by that third party to the taxpayer. The first submission in that case was that, at the time of the notices, no amount was ``due'' by the taxpayer in respect of any tax because it was not then immediately ``payable'': cf. s 218(1)(a)(i), so that the notice had no effect on the money held on deposit by the bank. That submission was rejected. The second, and also unsuccessful, submission was that the notices did not oblige the bank to comply with them when the deposits matured because, by that time, the moneys were not due to the taxpayer but to the assignee. It was the second issue which, it was submitted, threw some light on the present question. As is apparent from that case, the real issue was as to the effectiveness of the service of the s 218 notices in preventing subsequent unrestricted assignment of the debt the subject of the notices, rather than whether there was a sufficient ``holding'' of money by the bank or that the bank was not holding the money on deposit for the taxpayer upon terms at the time of the notices. The point now in issue did not really arise for consideration in that case. The High Court's response was that, once the notices were given, they operated according to s 218 to prevent any subsequent dealing with the moneys which prevented compliance with the notices when the time for compliance came (per Gibbs CJ at ATC 4433; CLR 11). The subsequent assignment was ineffective to relieve the bank of that statutory obligation to pay the money to the DCT. Mason J (at ATC 4438; CLR 19) described the effect of the notice as the end result of the principle that an assignee of a chose in action takes it subject to all the equities that the debtor or fund holder (my emphasis) has against the assignor as at the time of the notice of assignment. The assignee could not be in a better position than the assignor taxpayer was prior to the notice of the assignment.
It was significant that a claim by the taxpayer for payment of the term deposits before they became payable could have been resisted by the bank, inter alia, on the ground that the notices imposed an obligation on the bank to pay at maturity the money to the DCT. As was explained per Mason J (at ATC 4440; CLR 23), with whom Aickin and Wilson JJ agreed:
``... The section relates to moneys owing to the taxpayer when the notice is given, it imposes an obligation to pay forthwith moneys which are then payable; it imposes an obligation to pay moneys which become
ATC 4492payable at a future time when that time arrives.''
In my view, there is nothing in that decision which directly advances the DCT's contention. It is clear that the bank was at material times treated as, and was, the holder of moneys owing to the taxpayer which would become payable at a future time. The nature of a ``holding'' did not need to be considered.
Donnelly (above) involved a notice given under s 218 of the Tax Act to the Health Insurance Commission requiring it to pay to the DCT certain moneys otherwise payable to the taxpayer by way of Medicare benefits under ``bulk billing'' arrangements, the patients having assigned their Medicare benefits to the taxpayer. There was no issue that, at a certain point in time, the Health Insurance Commission became liable to pay such benefits to the taxpayer. That of course distinguishes that case from the present circumstances. Those notices were given on 23 December 1986, and subsequently the taxpayer became bankrupt, commencing for the purposes of the relation back period on 22 May 1987. The trustee of the bankrupt's estate sought to recover under s 118 of the Bankruptcy Act 1966 payments made, or certain of the payments made, to the DCT by the Health Insurance Commission pursuant to the notices. The legal effect of the notices, and the status of the payments made under them, was a critical issue in the case.
Von Doussa J, with whom Lockhart J agreed on this point, (at ATC 5080; FCR 442) concluded that a notice under s 218 may be given prospectively under s 218 and, in that event, no obligation is imposed on the third party unless and until circumstances arise between the third party and the taxpayer which bring into existence an identifiable debt owing to the taxpayer, whether payable forthwith, or on a fixed date, or on a contingency. Thus, he said (at ATC 5080; FCR 443):
``... until there is an identifiable sum of money owing to the taxpayer [by the recipient of the notice] the conditions of the section are not met. It is the coming into existence of the identifiable debt which crystallises the obligation on the third party to pay to the Commissioner the `money' referred to in sec 218(1) and provides the measure of the obligation which is imposed by the notice.''
Again, I do not think that decision helps the DCT unless it can be shown that, in the circumstances, Kelly & Co either before or at the settlement held money for or on behalf of the company so that at that point there was an identifiable debt owing by Kelly & Co to the company. The decision reflects a commonsense perception of what would constitute a ``holding'' of money, rather than an artificial or refined meaning of that term. The Full Court in Donnelly (above) also decided that, once the obligation to which a notice under s 218 of the Tax Act is directed crystallises, then the recipient of the notice must pay the money referred to in it to the DCT and the s 218 notice creates a charge over the monies in favour of the DCT. However, in the present circumstances that potential charge, or assignment, will not at any time come into effect unless and until the statutory notices directed to Kelly & Co, and intended to operate prospectively, gave rise to the obligation contemplated, namely only when and if an identifiable debt owing to the company, or holding of money on behalf of the company, by Kelly & Co came into existence. I do not think the decision assists the DCT in establishing that such a state of affairs did or did not arise at, or prior to, the settlement.
For similar reasons, I do not think Norgard (above) assists the DCT in this matter, either in the sense of throwing light on the meaning of ``holds'' or in illustrating an approach to the operation of the statutory notices favourable to the DCT's contention. At issue in that case was the priority of competing claims of the DCT for sales tax, notices having been given to some of the trade debtors of a company under s 38 of the Sales Tax Assessment Act (No 1) 1930 (the legislative predecessor of s 74 of the Sales Tax Act), and of two debenture holders of the company. It is unnecessary to further refer to the facts, as the indebtedness of the various trade debtors to the company was not in question. The point now in issue did not arise for consideration.
I have referred to the events at the settlement. In my view, the momentary possession by Ms Arnold at settlement of the six bank cheques, or of the bank cheque for $194,000 payable to the DCT, does not fall within the description of a ``holding'' of money for or on account of the company in the relevant sense. Ms Arnold had no lawful power to do anything with that
ATC 4493cheque except to pass it to Mr Nissen. At no point did the statutory notices operate in any way to dictate or restrict the way in which Kelly & Co could deal with the bank cheque, or indeed with the bank cheques presented at settlement. Nor could Kelly & Co, in the absence of the notices, have dealt with the bank cheque in any event. It was not suggested that Kelly & Co was in fact entitled to receive the sale proceeds on its own behalf, and although Mr Nissen when he decided to cause the notices to be issued did contemplate that the sale proceeds would be paid to Kelly & Co's trust account for dispersal, that did not in fact happen.
In the words used by von Doussa J in Donnelly, there was in my judgment no identifiable sum of money owing to the company by Kelly & Co at any relevant time, so the operation of the section by means of the statutory notices did not crystallise.
I do not think that that situation is altered by Kelly & Co shortly before settlement apparently having the capacity, on behalf of the company, to direct the purchaser to pay the settlement sum by a series of bank cheques. The situation is quite different from that which obtained in Clyne (above), as Kelly & Co at that time in no sense held the settlement money nor was it then, or at any time, entitled to receive the settlement money. I have noted that the procedure adopted accorded with common commercial practice; indeed, nothing to the contrary was suggested. Apart from the cheques requested to 600 Machinery Pty Ltd for $30,617.32 and to Kelly & Co for $5,000, the other four bank cheques were to secured creditors or the DCT. There is nothing to indicate whether any of the three secured creditors requested that form of payment, or would have been prepared to surrender or transfer the charged assets to the purchaser for some other form of payment. I infer that each would surrender its security or transfer the charged assets only for payment, so that the request by Kelly & Co for those bank cheques involved no element of discretion on its part. No submission was put that I should treat any of the six bank cheques differently. Thus, I do not conclude in any event that Kelly & Co, in requesting payment of the settlement sum by the series of bank cheques, was exercising any discretionary power in relation to how the settlement sum was to be paid. Even if it were, in my view as a matter of fact, it did not at the time of preparing or issuing the settlement statements for the sale and purchase of the company's business hold the sum of $1.15 million on behalf of the company or at all. That sum was held by the purchaser. The purchaser continued to hold that sum until the settlement; the settlement was the formal occasion when it handed over that sum by way of six bank cheques in exchange for the business and assets it acquired including the assets otherwise secured or charged in favour of the company's secured creditors.
Accordingly, even though the statutory notices when issued were valid, they could not crystallise until at the earliest at the settlement, on 3 November 1994: see Donnelly (above). As I have concluded, at settlement, Kelly & Co did not then hold the settlement sum of $1.15 million paid by six bank cheques (except possibly the bank cheque payable to it) and including the bank cheque to the DCT of $194,000 in the relevant sense for or on behalf of the company.
There is a further matter raised by the parties in relation to the defence based upon the statutory notices, based upon the nature of the payment of the settlement sum by bank cheques. It was submitted for the applicant that, in any event, the temporary holding of the bank cheques by Ms Arnold at settlement did not amount to a holding of money due to the company under s 218(1)(b) of the Tax Act or s 74(8)(b) of the Sales Tax Act because the bank cheque was not ``money''. It was submitted for the respondent to the contrary, and further that, as each of the six bank cheques was a bearer cheque, they were each held by Kelly & Co momentarily and for or on behalf of the company.
Each of the bank cheques was clearly a cheque as defined in the Cheques and Payment Orders Act 1986 (``the Cheques Act''): see in particular ss 5 and 10. Although each of the cheques was payable to a specified person, that specification was not to that person only, so each was a cheque payable to bearer: ss 19-22 of the Cheques Act. The cheques, being bearer cheques, were delivered to Kelly & Co but only as a conduit for or agent for the respective payees. It is not suggested that Kelly & Co, although perhaps technically a holder of the cheques and so perhaps persons to whom the cheques had been delivered: cf s 29 of the
ATC 4494Cheques Act, were on their own behalf holders in due course, and the taking of delivery on their own behalf would not have been in good faith or for value: s 50 of the Cheques Act. The circumstances, in my view, constituted a delivery of the cheques to the respective payees specified in the cheques rather than to Kelly & Co in its own right, or for or on behalf of the company. Thus, even if the bank cheques were the equivalent of cash, and so constituted ``money'' for the purposes of s 218 of the Tax Act and s 74 of the Sales Tax Act, there was no holding of money by Kelly & Co for or on behalf of the company. The situation would clearly have been different had the bank cheques been payable to the company, or to Kelly & Co; then, any subsequent negotiation of them by Kelly & Co may well have been in breach of obligations imposed by the statutory notices. I note that s 40(1) of the Cheques Act provides:
``The transfer of a cheque by negotiation is the transfer of the cheque from the holder to another person in such manner as to constitute the other person the holder.''
and s 40(3) of that Act provides:
``A cheque payable to bearer is transferred by negotiation if it is delivered by the holder to another person (whether or not the cheque is indorsed by the holder).''
Section 3(1) defines ``holder'' to mean, in relation to a cheque payable to bearer - the bearer, and it defines ``bearer'' to mean the person in possession of a cheque payable to bearer.
As I have said, in my view, the handing over of the bank cheques to Ms Arnold was not the transfer of the cheques to Kelly & Co in its own right or to Ms Arnold in her own right by the purchaser, or by the purchaser's solicitor, in such a manner as to constitute Kelly & Co in its own right the holder; the process was the transfer of the cheques to the respective nominated payees, including to the DCT. If that were not correct, the relevant holder in any event would be Ms Arnold, rather than Kelly & Co, as it is not logical on the one hand to treat Ms Arnold as no more than the agent of Kelly & Co but on the other hand to ignore the real role of Kelly & Co as agent of the respective payees. If Kelly & Co or Ms Arnold had sought, for example, to simply leave the meeting with the cheques intending to hand them over to the company, it is hard not to see that such action would have been improper and potentially subject to proceedings including injunctive proceedings by the DCT or by the other payees nominated:
Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia  2 NSWLR 227;
Justin Seward Pty Ltd v Commissioners of Rural and Industries Bank (1981-82) 60 FLR 51, or to imagine that Kelly & Co could have proceeded against the drawing bank if it had declined to meet the cheque orders upon presentation of the cheques by Kelly & Co.
Finally, I refer to a separate and, if correct, effective response made by the applicant to the DCT's defence based on the statutory notices. It is that, in any event, each of the two payments was made pursuant to the compromise agreement and neither was pursuant to the statutory notices.
Section 218(1) of the Tax Act empowers the Commissioner at any time, or from time to time, to amend or revoke any notice under it or to extend the time for making any payment pursuant to it. No similar expression is contained in s 74 of the Sales Tax Act. So far as I am aware, the nature of the charge or assignment created by a notice under s 218 of the Tax Act or s 74 of the Sales Tax Act once the notice has thereafter been amended or revoked has not been fully discussed in authorities. It is unnecessary to explore that question. Nor, so far as I am aware, has the means by which any amendment or revocation of such a notice may be effected been discussed in authorities. There was no written revocation or amendment of the statutory notices in the present circumstances.
I find that the statutory notices were not revoked in fact. Neither Mr Nissen nor Mr Hobbs regarded them as revoked, but thought that they were still in force. Thus, in the event that crystallising events later occurred, eg. if Kelly & Co later received other moneys as solicitors on behalf of the company, the statutory notices would operate according to their terms.
The amount specified in the statutory notices totalled $270,063.06. If the obligations on Kelly & Co by virtue of the statutory notices crystallised at the settlement by Ms Arnold momentarily holding the six bank cheques totalling $1.15 million payable as described above, as the DCT contends, why did it not comply with the statutory notices and why does
ATC 4495the DCT now not seek to assert that it erred in failing to do so? One obvious explanation, reflecting my primary conclusion, is that in the circumstances the obligation contemplated by the statutory notices never crystallised. If, contrary to that conclusion, it did so, then it is necessary to determine the legal significance of the events at settlement in light of the fact that the statutory notices, in their terms, were not complied with. Nor does the DCT assert that they should then have been complied with, except in respect of the payment to the DCT of $194,000.
As mentioned above, neither the DCT nor Kelly & Co regarded the statutory notices as revoked. They remained in force. The compromise agreement itself did not directly amend the statutory notices, or extend the time for payment. Kelly & Co was not itself a party to the compromise agreement, having negotiated it on behalf of the company. In any event, there was no extension of time for payment; there is no suggestion that Kelly & Co could pay $194,000 pursuant to the statutory notices from the settlement sum on 3 November 1994 and the balance of $76,063.16 from the settlement sum at some later stage. That leaves, in my view, two options: either the statutory notices were somehow amended, so that they were to read as requiring $194,000 to be paid from the $1.15 million settlement sum ``held'' by Kelly & Co and the balance to be paid from some future unidentified and unanticipated sum, or that there was some agreement between Kelly & Co and the DCT that the settlement sum ``held'' by Kelly & Co would somehow not attract the operation of the statutory notices. Those alternatives are both somewhat contrived or artificial, in the sense that they represent possible legal explanations for what was understood to be happening at settlement, namely the DCT would accept at the settlement from the purchaser $194,000 towards payment of the outstanding taxation liabilities of the company, and provided other terms of the compromise agreement were met (as ultimately they were) the company's taxation liabilities would be fully discharged. It was clearly implicit as between the DCT and Kelly & Co that, in the event of the company defaulting in performing the balance of the compromise agreement so that the full taxation liability of the company became payable, nevertheless the DCT would not assert as against Kelly & Co that the statutory notices required Kelly & Co to have paid to the DCT the full amount specified in the statutory notices. Of those two alternatives, my view is that the appropriate legal characterisation is an understanding between Kelly & Co and the DCT subsidiary to the compromise agreement that the DCT would not, in respect of the payment of the settlement sum of $1.15 million, require Kelly & Co to comply with the statutory notices at all. That is a simpler legal explanation, and avoids a very artificial finding otherwise of an agreement to vary the notices in a quite complex way to reflect the common understanding that the statutory notices otherwise remained on foot. In reaching that conclusion, I have assumed that it would be lawful for the DCT to make such an arrangement, without in some way formally amending or revoking the statutory notices. As the purpose of s 218 of the Tax Act and s 74 of the Sales Tax Act is clearly to enable the DCT to enhance his prospects of recovery of unpaid taxation liabilities, I think it must be within his power not to insist on the operation of those statutory rights following the giving of the statutory notices. I do not think the statutory scheme was intended to remove that flexibility from him; it would not make commercial sense to do so.
If that be correct, the anticipatory waiver by agreement of compliance with the statutory notices would mean that, at settlement, the moneys paid and so ``held'' by Kelly & Co, and then onpaid by Kelly & Co, were not caught by the statutory notices in the particular circumstances. Then, the payment of the $194,000 was not made pursuant to the notices, and no charge in favour of the DCT of any part of the $1.15 million arose.
Accordingly, on the assumption contrary to my primary conclusion that Kelly & Co did at settlement ``hold'' the settlement sum of $1.15 million for or on behalf of the company, I would nevertheless find that the payment of $194,000 was not made pursuant to either of the statutory notices, and no charge or assignment by virtue of those statutory notices crystallised. Thus, in my view, for that alternative reason, this ground of defence is not made out.
In respect of the defences based upon the statutory notices, I turn briefly to consider the additional matters raised in the event that my conclusions above are found to be erroneous.
I would find in any event that, even if the payments at settlement were made pursuant to the statutory notices from moneys held by Kelly & Co for or on behalf of the company (contrary to my primary conclusion), they would nevertheless constitute payments made by the company. For the purposes of s 588FA, the payment need not be made directly by the company; it may be made by an agent and can comprise payment by a company provided the payment is made by the agent not from its own monies but from monies to which the principal is entitled: see
Walsh v Terranova Pty Ltd (1994) 14 ACSR 432 and compare
Ramsay v National Australia Bank Limited (1988) 6 ACLC 625;  VR 59. Payment by the recipient of a notice is deemed to have been made under the authority of the taxpayer: s 218(4) of the Tax Act and s 74(6) of the Sales Tax Act. It would be a surprising outcome if payment by a company for the purposes of s 588FA applied to payment from its own funds, but not payment by its agent from the company's funds held by its agent (eg in a solicitor's trust account or indeed money held by a trustee) and subject to its direction.
However, on that assumption, the statutory notices had the effect of creating a statutory charge so that the DCT became a secured creditor of the company: see Donnelly (above, at ATC 5091; FCR 456) per Hill J with whom Lockhart J agreed. That status could only have arisen when the operation of the statutory notices crystallised at, or at best shortly before, settlement. In that event, however, the payment could not be one caught by the relation back period. Apart from the reasons expressed by Hill J in Donnelly (above, at ATC 5091-5092; FCR 457-468), I observe that the definition of ``transaction'' in s 9 of the Law requires the company to be a party to it and includes a charge only if the company creates the charge. It may seem somewhat incongruous that, within the relation back period, a company might secure an outstanding taxation indebtedness to the DCT, intending to pay it from moneys to be received either from its debtors or by selling its entire undertaking and the DCT in that event might be vulnerable to an order under s 588FF of the Law, but the DCT by giving notices under s 218 of the Tax Act or s 74 of the Sales Tax Act directly to the debtor or purchaser (as the case may be) within that same period may insulate itself from that possible consequence. However, that appears to reflect the legislative intent. Consequently, if contrary to my conclusions above, the payment of $194,000 was made by Kelly & Co from money held by it for or on account of the company and was made pursuant to the statutory notices, then in my judgment the DCT would not be vulnerable to attack under Part 5.7B of the Law.
There are no other considerations which, in my view, lead to a decision in the circumstances not to make an order in favour of the applicant under s 588FF of the Law. For the reasons given above, in my judgment, the receipt by the DCT of the two payments of $194,000 and $41,000 respectively was in circumstances which attract in turn the operation of ss 588FA, 588FC and 588FF of the Law and I order that the sum of $235,000 be repaid to the applicant.
No submission was made that, in the event that I determine the claim in favour of the applicant, the normal rules should not apply. However, although I have directed repayment of the sum of $235,000, as appears from the evidence which I have accepted on the question of whether the DCT did in fact receive a preference, that is the evidence of Mr Sims and of the applicant, there appears a strong likelihood that the sum of $49,085.57 which is covered by the operation of s 221P of the Tax Act will be promptly repayable to the DCT because of the priority that section prescribes. In those circumstances, I think it fairer that interest should be payable only on the balance of the sum ordered to be repaid, namely $185,914.43. In my discretion I round that figure to $186,000.
Accordingly, pursuant to s 51A(1) of the Federal Court of Australia Act 1976 and O 35 r 8 of the Federal Court Rules I include in the judgment sum an amount for interest on the basis that the DCT pay to the applicant interest on the amount ordered to be repaid under s 588FF of $186,000 from 4 April 1995, being the date of appointment of the applicant as administrator of the company, calculated at 12% per annum.
I have directed that interest should run from the date of commencement of the winding up of the company: see
Maurice Drycleaners Pty Ltd (in liq) v National Australia Bank Ltd (1990) 8 ACLC 798
ATC 4497per Hodgson J at 800;
Hamilton v Commonwealth Bank of Australia (No 2) (1992) 10 ACLC 1,611 per Hodgson J at 1,615.
As my conclusion is that the applicant should succeed on his claim against the DCT, I turn to consider the DCT's cross-claim against the directors of the company under s 588FGA of the Law. That cross-claim is limited in the particular circumstances to the order I propose to make under s 588FF to the payment in respect of the liability under s 221F of the Tax Act, but excluding the payments received for late payment penalty under s 221F(12): s 588FGA(1)(a).
The DCT applied the payment of $194,000 received on 3 November 1994 firstly in payment of the outstanding tax instalment deductions, then totalling $169,169.70, and the balance of $24,830.30 in part payment of the outstanding sales tax. The payment of $41,000 received on 6 February 1994 was applied firstly in payment of the tax instalment deduction for the company's October 1994 trading and payable on 7 November 1994 of $11,829.37, and then to payment of the outstanding sales tax of $15,858.41, and the balance of $13,312.22 late penalty payment imposed under s 221F(12)(b)(ii)(A) and (B) of the Tax Act. There was later paid by the liquidator the additional sum of $1,547.25, representing the adjustment for tax instalment deductions and sales tax for the October 1994 trading of the company when, ultimately, it provided its final records. The DCT acted properly in allocating the payments so received in that way; no submission to the contrary was made. Thus the amount claimed under s 588FGA is $180,999.07, being the total of the two amounts received for tax instalment deductions of $169,169.70 and $11,829.37.
Each of the directors at the time of the two payments is liable to indemnify the DCT in respect of any loss or damage resulting from the order to be made under s 588FF: s 588FGA(2), and I may make the order sought on the cross- claim: s 588FGA(4). The directors raise the defence available under s 588FGB(6) which provides that:
``It is a defence if it is proved that:
- (a) the person took all reasonable steps to prevent the company from making the payment; or
- (b) there were no such steps the person could have taken.''
Subsection (7) directs attention specifically, but not exclusively, to any actions taken to appoint an administrator of the company, and the timing and results of that action, in addressing issues under subs (6).
There has been little judicial consideration as to the scope of the protection which s 588FGB(6) affords. It is one of the four defences in s 588FGB, the other three of which I coarsely paraphrase as follows: firstly if the payments were made when the directors had reasonable grounds to expect, and did expect, that the company was solvent, at that time and would remain so (subs (3)); secondly if the directors reasonably believed in information provided by a reliable third person that the company was, and would remain, solvent (subs (4)); and thirdly that illness or other good reason led to the directors not being involved in the management of the company at the relevant time (subs (5)). I was referred by counsel for the DCT to
Re Scobie; Ex parte Deputy Commissioner of Taxation (1995) 31 ATR 195 and
Simpson v DFC of T 96 ATC 4661; (1996) 33 ATR 139, as helpful decisions. They were both decisions about s 222AOJ(3) of the Tax Act, which provides directors with a defence to a claim for a penalty to be imposed against them under s 222AOB(1) of the Tax Act for failing to cause a company to remit tax instalment deductions or to reach an agreement in relation to payments or to cause the company to go into voluntary administration or liquidation. The defence available is to prove that the directors took all reasonable steps to ensure that the directors complied with s 222AOB(1) or that there were no such steps that the person could have taken. The terms of s 222AOJ(3) of the Tax Act are very similar to those of s 588FGB(6) of the Law. The point of each of those cases was that the defence required proof of those matters from the time when the company first defaulted, and not from the time notice was given to the directors of the DCT's intention to pursue the claim against them, and on the evidence in each case the defence was not made out. Accordingly, whilst indicating that such provisions should be given their proper effect, those decisions were really focussed on a different issue.
What is put by the directors is that ``they were at pains to attempt to resolve in some way
ATC 4498the dispute with the taxation department'' and that they ``took steps to try to make sure that the payment was not made unless the company actually had the funds to make the payment'' and that there were no reasonable steps that they could have taken to prevent the payment being made, especially in the face of the statutory notices. None of the directors gave evidence. There is no evidence that the directors took any steps to prevent the company from making either payment. Indeed, their solicitors procured the payment of 3 November 1996 on their instructions, and they actually caused the second payment to be made.
In my view the defence is not made out. The defences potentially available under subs (3)- (5), but not pursued, relate to circumstances where the payment was made without ``fault'' on the part of the directors, in the sense that the directors either had reason to believe that no question of an improper payment would arise or had an excuse for not preventing the payment. Similarly the defence under subs (6), in my view, contemplates circumstances where the payment was made despite the directors, either because they tried to prevent it or could not have done so. The focus of the subsection is on preventing the payment. It is not, in my view, to the point that the payment may have reflected a sensible commercial judgment at the time and in the circumstances in which it was made. In my view that is not the relevant test. I do not think the defence is made out where, on the facts, the directors far from taking steps to prevent the payment or from being powerless to prevent it, procured it.
No submission was made that the position of any one or more of the directors should lead to any director being in a different position to any other director.
The payments referred to for present purposes are the two payments made on 3 November 1994 and 31 January 1995. It is in respect of those two payments that I propose to make an order under s 588FF of the Law. The relevant loss or damage to the Commissioner has not been quantified except as a claim for indemnity in respect of any order plus interest. I do not know to what extent there will be a loss ultimately, so I propose to make a declaratory order on the basis that the DCT and the directors will be able to quantify that loss only when the distribution to creditors is finally resolved. In that regard I note that, barring presently unidentified circumstances, at least the $49,085.57 reflecting tax instalment deductions which were payable up to the time when the priority granted by s 221P of the Tax Act existed is likely to be recovered in full. There is at least a significant prospect of further recovery ultimately by the DCT as an unsecured creditor in respect of the balance which it must presently repay and for which it now seeks indemnity.
Accordingly, I give judgment on the cross- claim in favour of the DCT by declaring that the DCT be, and is entitled to be, indemnified by the directors in respect of his loss sustained by reason of the order made pursuant to s 588FF of the Law in respect of the sum of $180,999.07, and the interest paid by the DCT pursuant to my judgment on the amount ultimately determined to be payable by the directors to the DCT of that sum of $180,999.07. Such amount will have reflected any amounts recovered by the DCT as an unsecured creditor in the winding up of the company, whether by reason of its priority or otherwise. In determining the interest component of that amount, the calculation will have to reflect that I have not awarded interest to judgment against the DCT on the sum of $50,000, being a rounding up of the amount in respect of which the DCT has a statutory priority under s 221P of the Tax Act, and which is part of that sum of $180,999.07. Interest on the judgment sum itself awarded against the directors in favour of the DCT will run pursuant to s 52 of the Federal Court of Australia Act 1976 in any event.
The Court declares that:
1. The payment by Australian Company Number 007 764 249 Pty Ltd (``the company'') to the respondent and the receipt by the respondent of the sums of
- a) $194,000 on 3 November 1994, and
- b) $41,000 on or about 6 February 1995 were each an unfair preference and an insolvent transaction and a voidable transaction pursuant to ss 588FA, 588FC and 588FE of the Corporations Law.
2. The cross claimant be, and is entitled to be, indemnified by the cross respondents in respect of such part of the sum of $180,999.07 as the cross claimant does not recover from the company in its liquidation, and being proportion of the sum the subject of the
ATC 4499declaration in par 1 hereof, together with the interest on the amount so declared to be payable for which the respondent is liable to the applicant.
The Court orders that:
1. The respondent do pay to the applicant, as liquidator of the company, the sum of $235,000.
2. The respondent do pay to the applicant interest on the sum of $186,000 thereof calculated at the rate of twelve per centum per annum, such interest to be calculated from 4 April 1995 to the date of this order.
3. The cross respondents do pay to the cross claimant the amount determined to be payable in accordance with par 2 of the declarations made this day.
4. The respondent do pay to the applicant his costs of the application to be taxed.
5. The cross respondents do pay to the cross claimant his costs of the cross-claim to be taxed.
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