New South Wales Supreme Court CITATION : Driver v Commissioner of Taxation [1999] NSWSC 816 revised - 13/08/99 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 4789 of 1997 HEARING DATE(S) : 29 June 1999 JUDGMENT DATE : 11 August 1999 Nicholas Paul Driver Liquidator of Tilse Building Pty. Limited (In Liquidation) ACN 004 014 993 (Plaintiff) PARTIES : Commissioner of Taxation (Defendant/Cross Claimant) Brent Anthony Tilse (First Cross Defendant) Julie Anne Tilse (Second Cross Defendant) JUDGMENT OF : Windeyer J at 1 COUNSEL : Mr. Michael Meek (Plaintiff) Mr. Selwyn Gibb (Defendant/Cross-Claimant) Sparke Helmore (Plaintiff) SOLICITORS : Australian Government Solicitors (Defendant/Cross-Claimant) Brent Anthony Tilse (in person) (First Cross-Defendant) Julie Anne Tilse (no appearance) (Second Cross-Defendant) CATCHWORDS : CORPORATIONS - insolvent transactions - unfair preferences - meaning of 'transaction' - whether company is a party to a transaction Corporations Law ACTS CITED : Income Tax Assessment Act 1936 (Cth) Companies (New South Wales) Code New Zealand Companies Act 1955 Re Hardman (1932) 4 ABC 207 Re Peter Austin Ltd [1990] 2 NZLR 245 CASES CITED : Commissioner of Taxation v Macquarie Health Corporation (1999) 17 ACLC 171 Commissioner of Taxation v Comber (1986) 10 FCR 88 East Finchley Pty. Ltd. (1989) 90 ALR 457 DECISION : See paragraphs 16-19 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J WEDNESDAY 11 AUGUST 1999 4789/97 NICHOLAS PAUL DRIVER Liquidator of TILSE BUILDING PTY LIMITED (IN LIQUIDATION) v COMMISSIONER OF TAXATION & ORS JUDGMENT Outline 1 The plaintiff as liquidator of Tilse Building Pty Ltd seeks a declaration that the payments of two sums of money, the first of $10 000 and the second two payments totalling $84 425.40 to the Commissioner of Taxation are void as against the liquidator on the ground that they are insolvent transactions within s588FE of the Corporations Law. The plaintiff further seeks orders pursuant to s.588FF of the Corporations Law directing the defendant to pay those sums of money to the liquidator. Background Facts 2 Tilse Building Pty Ltd was a company engaged primarily in the business of home building. By 1993 the company was experiencing a downturn in the level of work done which resulted in a significant impact on the company's cash flow and its ability to service its creditors. The company had problems with the Australian Taxation Office (ATO) which included failing to lodge group and Prescribed Payments Scheme(PPS) tax returns on time and failure to pay group, Prescribed Payments tax and income tax liabilities by the due date. In July 1994 the ATO served a Creditor's statutory demand on the company. 3 In August 1994 the company lodged a request for an amended assessment in respect of its 1991 income tax return as the company's records had overstated the work in progress value and so the disclosed income was overstated. On 16 December 1994 an amended assessment was issued by the Commissioner for a credit of $62 517.40. This sum was then applied pursuant to s.172 of the Income Tax Assessment Act 1936 (Cth) by the Commissioner to the company's unpaid PPS liability: Section 172 is as follows: 172. (1) Where, by reason of an amendment of an assessment, a person's liability to tax is reduced: (a) the amount by which the tax is so reduced shall be taken, for the purposes of sections 170AA, 207 and 207A, never to have been payable; and (b) the Commissioner shall: (i) refund the amount of any tax overpaid; or (ii) apply the amount of any tax overpaid against any liability of the person to the Cth, being a liability arising under, or by virtue of, an Act of which the Commissioner has the general administration, and refund any part of the amount not so applied. 4 In February 1995 the company lodged a request for an amended assessment in respect of its 1993 income tax return, and an amended assessment issued gave the company a PPS tax credit of $21 908. This sum was then applied by the Commissioner to tax liabilities owed by the company pursuant to s221YHG(2) Income Tax Assessment Act which is as follows: 221YHG (2) Where, in a case to which none of subsections (3), (4) and (4A) applies, a person is entitled to a credit under section 221YHF, the Commissioner shall: (a) if the amount of the credit does not exceed the tax payable by the person under an assessment in relation to the year of income in which the deductions to which the credit relates were made - apply the amount of the credit in payment or part payment of that tax; and (b) if the amount of the credit exceeds the tax payable - apply: (i) so much of the amount of credit as does not exceed the tax in payment of the tax; and (ii) so much of the excess as does not exceed the amount of any other tax payable by the person in payment or part payment of that other tax. 5 These two sums make a total of $84,425.40 which the Commissioner has applied to the outstanding tax liability of the company. The other payment which the liquidator seeks to have declared void is the payment by the company to the Commissioner in November 1994 of $10 000 by cheque drawn on the account of the company. 6 In April 1995 Mr Driver was appointed voluntary administrator, and in May liquidator of the company. There is evidence that the company was insolvent from at least 24 October 1994. A number of creditors had commenced legal action, 65% of creditors had been outstanding for a period in excess of 60 days trading terms and a large number of cheques had been dishonoured by the company's bank. The sum of $84,425.40 7 This amount represents the two sums of money outlined above. The plaintiff seeks orders pursuant to s588FF of the Corporations Law that these payments are void against him. The relevant sections of the Corporations Law are set out hereunder They are set out in logical order for consideration of the questions which arise in this action: s.588FE (2) The transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it: (i) during the 6 months ending on the relation back day; or (ii) after that day but on or before the day when the winding up began s.588FC A transaction is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; s. 588FA(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction; and (b) 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 were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. 8 The first question to be determined is whether the application of each of the sums of money by the Commissioner constitutes a transaction to which both the company and the Commissioner are parties. Section 9 of the Corporations Law defines "transaction" as follows: "transaction", in Pt5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party; for example (but without limitation): (a) a conveyance, transfer or other disposition by the body of property of the body, and (b) a charge created by the body on property of the body; and (c) a guarantee given by the body; and (d) a payment made by the body; and (e) an obligation incurred by the body; and (f) a release or waiver by the body; and (g) a loan to the body; and includes such a transaction that has been completed or given effect to, or that has terminated; 9 It will be noted that the requirement for the company to be a party appears both in the definition section and in s588FA(1)(a). It was indicated by Counsel that there was no case on this point and I have not found any. There is I think little doubt that the payments would have been "undue preferences" under s451(1) of the Companies (New South Wales) Code which is as follows: A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, by a company that, if it had been made or incurred by a natural person, would, in the event of his becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of the company being wound up, void as against the liquidator. The application would be characterised as a 'payment' pursuant to s.451. In Re Hardman (1932) 4 ABC 207 at 210 it was held that 'payment' may include a mere transfer of figures in an account without any money passing. 10 The question then is whether the requirement that the company be a party to the transaction changes this. The plaintiff submitted it was a transaction, relying on the reasoning in Re Peter Austin Ltd [1990] 2 NZLR 245. That case involved a company which had acted as agent of and advisor to an insolvent company and held certain funds on its behalf. Some of these funds were transferred by the company holding them to itself in order to satisfy fees due to it without the specific authorisation of the insolvent company. Tipping J said at 248 that the transfer of funds out of McIlroy-Kelly's trust account into its general account constituted a relevant disposition, being a payment from funds belonging beneficially to the company to McIlroy-Kelly beneficially. It is not necessary for present purposes to examine whether the payment was authorised directly by the company or was justified by dint of the fact that McIlroy Kelly had a lien on the funds or in some other way. The simple fact is that by means of the appropriate book entries payment was made from the company to McIlroy-Kelly; indeed the transaction could also be described appropriately as a transfer of property. He then went on to say at 249 that: in the present case the company suffered a payment or a transfer of its property at the hands of McIlroy-Kelly. Thus the liquidators have established the first necessary point, namely that the transaction was of a qualifying kind. 11 Although the facts seem similar to the present case Re Peter Austin Ltd dealt with the New Zealand Companies Act 1955. The relevant section of that Act dealing with unfair preferences is as follows: s.309 (1A) In the case of a voluntary winding up, every conveyance or transfer of property, every security or charge given over any property, every obligation incurred, every payment made (including any payment made in pursuance of a judgment or order of a Court), by any company unable to pay its debts as they become due from its own money, shall be voidable as against the liquidator, if - (a) it is in favour of any creditor or any person in trust for any creditor; and (b) The making, suffering, paying, or incurring of the same occurs within one month before the commencement of the winding up of the company: Provided that nothing in this subsection shall apply to any such transaction or any such payment in respect of any liability incurred or accruing due, during or after the said period. 12 This section like s.451(1) of the Companies (New South Wales) Code in contrast to s.9 of the Corporations Law does not require the company to be a party to the transaction for a transaction to exist. Therefore the court in Re Peter Austin did not address the issue of whether the company was a party to the transaction when concluding that a transaction existed for the purposes of the Act. The case did hold the transfer to be a "transaction" but went no further than that. 13 The Commissioner submits that where pursuant to a statutory authority or requirement he applies a tax credit of a company to other liabilities of the company to him there is no transaction to which the company is a party since each application is an activity in which only the Commissioner is engaged. He relied on the reasoning of Emmett J in Commissioner of Taxation v Macquarie Health Corp (1999) 17 ACLC 171. That case involved the giving of notice by the Commissioner under section 218 of the Income Tax Assessment Act to creditors of a company requiring them to pay to the Commissioner money which they owed to the company. Emmett J held at 196 that this was not a transaction to which the company was a party, although it may have been a transaction of the Commissioner concerning the company. He also said: The term 'transaction' entails a juridical act to which the relevant company is "a party". The definition of transaction in relation to a body corporate refers to a conveyance, transfer or other disposition by the body or a charge created by the body. Indeed every example given in the definition of transaction refers to a juridical act by the body other than paragraph (g) which refers to a loan to the body. 14 In the instant case while the company by furnishing amended assessments set in progress the issue of credits and the application under attack of those credits towards its outstanding liabilities that does not make it a party to the transaction. I have come to the conclusion that a company cannot be a party to a transaction unless it takes some part in it. Being an unknowing recipient of a credit with the Commissioner of Taxation does not amount to taking a part. The application of the credit is in fact a unilateral act. I agree with the judgment of Emmett J 15 The liquidator sought also to rely on section 221YHF (5) of the Income Tax Assessment Act which provides that where the Commissioner has applied an amount of credit in payment of an amount of tax payable by a person, the person shall be deemed to have paid the amount so applied. Thus the company is deemed to have paid that amount. The Commissioner argued that this subsection does not manifest a legislative intention that such an application is deemed to be a payment made by the company for the general purposes of the law, , but rather it is limited to its income tax law context, that is for the purposes of the Income Tax Assessment Act. This issue was considered by Fisher J in Commissioner of Taxation v Comber (1986) 10 FCR 88 , a case which dealt with s109 of the Income Tax Assessment Act , a deeming provision about payments of dividends. He concluded at 94 that deeming provisions are required by their nature to be construed strictly and the court should not extend by implication the express application of a statutory fiction which is only applicable in its particular context. This was followed by Hill J in East Finchley Pty Ltd (1989) 90 ALR 457 at 478 who held that the effect of a deeming clause will operate only for the purposes of the particular statute. Further in Commissioner of Taxation v Macquarie Health Corp at 196, Emmett J said: A notice under section 218 is given without reference to the relevant taxpayer and will normally be given without the knowledge of the relevant taxpayer. Further, it will often, although not necessarily, be given against the will or wishes of the relevant taxpayer. In those circumstances, it could not be said that a taxpayer is a participant in any sense in the giving of a notice or in the consequences which follow from the giving of the notice, whatever those consequences in law may be. Accordingly, a taxpayer is not in any sense a party to a section 218 notice or the giving of a section 218 notice". Under section 218 (4) of the Assessment Act, any person making any payment in pursuance of section 218: shall be deemed to have been acting under the authority of the taxpayer and all other persons concerned and is hereby indemnified in respect of such payment" It is clear that in most circumstances there will be no actual direction or authority given by the relevant taxpayer to the debtor of that taxpayer. Absent such a direction or authority and absent a provision such as section 218(4), a recipient of a notice who made a payment in accordance with its terms may well not obtain a discharge of the indebtedness to the relevant taxpayer. The effect of s.218(4), however, is that when the recipient of a notice makes a payment in accordance with its terms, the recipient will be able to obtain a good receipt from the Commissioner in respect of the payment. The effect of section 218(4) is to deem to have occurred something which did not occur. It has effect on the assumption that the relevant taxpayer has not participated in the arrangement whereby the relevant taxpayer's debt makes a payment to the Commissioner. Thus, section 218(4) could not have the effect of involving the relevant taxpayer as a participant in the transaction whereby the consequences of giving a notice, whatever those consequences in law may be, arise. I do not consider that a relevant taxpayer can be said to be a party to the giving of a notice under section 218, notwithstanding that, upon the giving of the notice, the authority of the taxpayer is deemed to be given for a payment to be made by the recipient in accordance with the terms of the notice. Accordingly, since the effect of the giving of a notice under section 218 is to create a charge or other analogous rights in respect of indebtedness of the recipient to the relevant taxpayer, there would not be a transaction of the taxpayer within the meaning section 588FE of the Law." 16 In light of these cases I conclude that the deeming provision of s.221YHF(5) does not make the company a party to the application of the money. 17 It follows the application of the sum of $84 425.40 was not a transaction as defined by s9 and s588FA(1)(a) of the Corporations Law. I should add that it seems to me this is a result which gives the Commissioner an advantage which he ought not to have, so that if I am correct the unfair result should be remedied by appropriate legislation. The sum of $10 100 18 This amount was a sum of money paid by Tilse Pty Ltd to the Commissioner in respect of outstanding tax liabilities. The cheque was drawn by the company on 22 November 1994 and received by the defendant on 24 November 1994. This is clearly a transaction to which the Commissioner and the company were both parties. Once the payment was established it was not contended that the transaction was not an unfair preference. 19 I will hear any submissions on interest and costs and will otherwise make orders to give effect to these reasons. ********** Last Modified: 08/13/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.