FEDERAL COURT OF AUSTRALIA

Kassem and Secatore v Commissioner of Taxation [2012] FCA 152

THE COURT ORDERS THAT:

1.    Within 7 days the applicants submit proposed short minutes of order in accordance with the judgment handed down today.

2.    The proceeding stand over to a date to be fixed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

THE COURT ORDERS THAT:

1.    Within 7 days the plaintiffs submit proposed short minutes of order in accordance with the judgment handed down today.

2.    The proceeding stand over to a date to be fixed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

INTRODUCTION

1    There are two proceedings before me that were heard together. The applicants/plaintiffs in each proceeding are the liquidators of a company formerly known as Mortlake Hire Pty Limited (Mortlake). In the first proceeding, the liquidators seek to recover payments made to the respondent (the Commissioner) in the six months prior to the commencement of the winding up. In the second proceeding the liquidators seek to recover payments made to the defendant (Allianz) in the same period. In each proceeding the liquidators assert that the relevant payments were unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth) (the Act).

2    The funds used to pay Mortlake’s debts to Allianz and the Commissioner were sourced from a company related to Mortlake known as Antqip Pty Ltd (Antqip). The liquidators submitted that the relevant payments were made by or on behalf of Mortlake. Allianz and the Commissioner submitted that the relevant payments were made by Antqip using its own funds. They argued that Mortlake was not a party to the relevant transactions and that the relevant payments which they received were not received from Mortlake.

3    Another issue arises in the proceeding brought against the Commissioner. The Commissioner says that if the relevant payments were made by or on behalf of Mortlake then the Commissioner did not obtain any unfair preference as a consequence of his receipt of such payments. In support of this argument the Commissioner relies upon a number of authorities in which s 588FA has been considered in the context of payments made on running accounts, prepayments and the supply of goods or services in return for “cash on delivery”.

factual background

4    At all relevant times Mr Anthony Hugh Russell was the sole director and shareholder of Mortlake. Until 8 February 2007 Mr Russell was also the sole director and shareholder of Antqip. On that date he resigned from that position in favour of his daughter who became the sole director of Antqip. Even then, however, Mr Russell continued to act as a manager of Antqip’s business. He was an authorised signatory of Antqip’s bank accounts (with authority to operate Antqip’s bank accounts electronically) and remained so even after he resigned as a director.

5    In the course of carrying on its business, Mortlake incurred liabilities to Allianz and to the Commissioner. Mortlake’s liabilities to the Commissioner were recorded in two separate accounts maintained by the Commissioner.

6    The first of these was the integrated client account, also known as the Running Balance Account (the Running Balance Account), which recorded Mortlake’s primary tax liabilities to the Commissioner. As at 26 March 2007, Mortlake had a debit balance of $649,699.53 showing in the Running Balance Account.

7    The second of the accounts maintained by the Commissioner (the Superannuation Guarantee Account) recorded the amount owing by Mortlake to the Commissioner in respect of superannuation guarantee charges arising under the Superannuation Guarantee (Administration) Act 1992 (Cth) (the SGA Act).

8    On 26 March 2007 the Commissioner received payment of $40,000 which reduced the balance of the Running Balance Account by that amount. Another payment of $30,000 was received by the Commissioner on 13 April 2007 and it also reduced the Running Balance Account by a corresponding amount.

9    On 1 August 2007 the Commissioner purported to reallocate the two payments made into the Running Balance Account to the Superannuation Guarantee Account in reduction of the superannuation guarantee charges owed by Mortlake. The reallocation had the effect of increasing the amount shown in the Running Balance Account by $70,000 and reducing by a corresponding amount the balance showing in the Superannuation Guarantee Account.

10    Mortlake became indebted to Allianz for workers’ compensation insurance premiums. These premiums were the subject of a statutory demand issued by Allianz to Mortlake in the amount of $50,365.64. The statutory demand was not complied with and Allianz commenced winding up proceedings against Mortlake.

11    On 21 August 2007 Allianz received two bank cheques in the amount of $30,000 and $26,000 from Mr Russell in full payment of the amount claimed by Allianz.

12    On 28 August 2007 Mortlake went into voluntary administration. The administrators were appointed as liquidators on 19 September 2007 after creditors resolved that Mortlake be wound up.

13    Antqip was the source of the funds used to make the payments to the Commissioner and to Allianz. Mr Russell gave evidence that it was his intention that Mortlake borrow from Antqip the funds it needed to pay to the Commissioner and Allianz.

14    The payments made to the Commissioner on 26 March 2007 and 13 April 2007 were made by electronic funds transfer from an account in the name of Antqip. As I have mentioned, Mr Russell was an authorised signatory for that account which he was authorised to operate electronically. He personally authorised each of the electronic funds transfers to the Running Balance Account.

15    According to Mr Russell, shortly after the electronic funds transfers to the Running Balance Account were made, he instructed Ms Preston, a bookkeeper employed by Mortlake, to record the amount of those payments as a loan from Antqip to Mortlake.

16    The payments to Allianz were made by way of two bank cheques purchased with funds drawn from accounts maintained by Antqip. Mr Russell gave evidence that he personally attended a branch of the National Australia Bank where he obtained the first of the bank cheques and at a branch of the Commonwealth Bank where he obtained the second of the bank cheques. He then hand delivered the bank cheques to Allianz which issued him with a receipt personally. Again, Mr Russell gave evidence that he instructed Ms Preston to enter the payment made to Allianz as a loan from Antqip to Mortlake.

17    One of the liquidators of Mortlake gave evidence that he does not expect there to be any distribution to any class of creditor of Mortlake even if the liquidators are successful in these proceedings against the Commissioner and Allianz. The liquidator who gave that evidence, Mr Kassem, reached that conclusion after allowing for costs associated with the voluntary administration and the liquidation. It was not suggested by the Commissioner or Allianz that there was any prospect of either of them receiving a dividend after payment of the costs associated with the voluntary administration and the liquidation.

THE CHALLENGE TO MR RUSSELL’S EVIDENCE

18    The clear effect of Mr Russell’s oral evidence was that the payments made to the Commissioner and Allianz were made using funds lent by Antqip to Mortlake for that purpose. Allianz, in particular, suggested that I should not accept Mr Russell’s evidence. There were two reasons why, according to Allianz, Mr Russell’s evidence should not be accepted.

19    In the first place, it was suggested that Mr Russell’s evidence was inconsistent with his failure to ensure that Antqip’s interest as a creditor of Mortlake was noted for the purposes of the meeting of creditors of Mortlake that took place on 19 September 2007 or to ensure that a proof of debt was lodged in the name of Antqip in the liquidation of Mortlake. Mr Russell represented himself at that meeting in his personal capacity (he claimed to be owed $45,000 in unpaid wages) and in his capacity as a director of other companies with which he was associated. One such company, Antqip Holdings Pty Ltd (Antqip Holdings), claimed to be owed $910,000 by Mortlake and Mr Russell took steps to ensure that those present at the creditors’ meeting (including, of course, the administrators) knew about the debt said to be owing to Antqip Holdings. That debt appears to have been secured by a charge over all of the assets and undertaking of Mortlake.

20    The failure of Mr Russell to notify the administrators and other creditors of Antqip’s claim against Mortlake is somewhat perplexing. There is evidence to suggest that Mortlake may have owed Antqip something in the vicinity of $600,000 around that time. Mr Russell was not able to provide any satisfactory explanation for him not having notified the administrators of Antqip’s claim around the time of the creditors’ meeting. Be that as it may, I am not satisfied that it is to be explained on the basis that Antqip was not owed any money by Mortlake. There is ample evidence before me that points strongly in favour of the conclusion that over a considerable period of time, Antqip was paying money to Mortlake or to Mortlake’s creditors in order to help Mortlake stay afloat. Quite apart from the payments the subject of these proceedings, there is evidence that shows that during 2006 and 2007 Antqip was making payments on account of Mortlake’s liability to the Commissioner for GST.

21    The second reason put forward by Allianz as to why I should not accept Mr Russell’s evidence was that it was not supported by Mortlake’s or Antqip’s accounting records. According to Mr Barnden, who was previously one of Mortlake’s liquidators, it was necessary to reconstruct a balance sheet and profit and loss statement because the computer used to store accounting records belonging to Antqip and Mortlake had been disposed of and he could not print any documents for the financial year ending 30 June 2007 from the replacement computer. Picking up on Mr Barnden’s evidence, Allianz argued that ledger entries tendered by the liquidators which described each of the relevant payments to Allianz as “loan to Mortlake Hire Pty Ltd for WC Insurance” were reconstructed records rather than contemporaneous records which were not, contrary to Mr Russell’s evidence, brought into existence at or about the time the relevant payments were made. Counsel for Allianz described the ledger entries as “fabricated”.

22    I do not accept that the records were fabricated if this is intended to mean that they purport to record transactions that never took place. There are other records which establish conclusively that Antqip provided the funds which were paid to Allianz and the Commissioner in discharge or reduction of Mortlake’s debts to them. If the accounting records relied upon by the liquidators are reconstructed – and I accept that may well be the case – they are, in my view, accurate in any event in the sense that I am satisfied on the whole of the evidence before me that the transactions to which they make reference took place and were of the character described.

Who made the relevant payments?

23    I am satisfied the payments made to the Commissioner and Allianz were in each case made by Mortlake using funds provided to Mortlake by Antqip. In the case of the electronic funds transfers to the Running Balance Account, this seems to be a clear example of a lender paying monies advanced to a creditor of the borrower in accordance with the borrower’s directions. Even though the funds were physically transferred to the Running Balance Account by Antqip, they were still funds advanced by Antqip to Mortlake that were paid to the Commissioner at Mortlake’s direction.

24    In the case of the bank cheques delivered by Mr Russell to Allianz, the position is equally clear. The inference to be drawn is that Antqip made the bank cheques available to Mr Russell, that they were received by him in his capacity as a director of Mortlake, and that they were used by Mortlake to pay its debt to Allianz.

25    Allianz argued that there was insufficient evidence from which to conclude that Mortlake’s debt was paid using its own money. It pointed to the absence of any loan agreement, company minute or other document recording the existence or terms of any arrangement between Mortlake and Antqip pursuant to which Antqip might have advanced funds to Mortlake. I do not think there is any substance to this argument. There is nothing remarkable about the absence of such documentation. I am not concerned here with large or sophisticated corporations or transactions involving particularly large sums of money. The absence of a loan agreement or other written record of the terms of the financial arrangements between Antqip and Mortlake is not something that I regard as inconsistent with the liquidators’ case. Each of the companies was relatively small and under common ownership. Moreover, there were loans made by Antqip to Mortlake in previous years.

26    Neither the Commissioner nor Allianz accepted that the transactions pursuant to which Mortlake’s debts to them were paid or partly paid involved any loan from Antqip to Mortlake. However, they did not advance any plausible explanation that would account for Mortlake’s debts being paid or partly paid with funds made available by Antqip. It was not suggested that any form of capital contribution was involved. While it was submitted by Allianz that the payments to it may have been made voluntarily in the sense that Antqip was paying Mortlake’s debts free of any obligation of repayment, that explanation is inconsistent with Mr Russell’s evidence of his own intentions and would require me to infer that he was simply giving away Antqip’s assets for no consideration. I am not prepared to draw such an inference.

27    In the circumstances, I am satisfied that each of the relevant payments to Allianz and the Commissioner was a payment made by or on behalf of Mortlake using moneys borrowed by Mortlake from Antqip.

Section 588FA

28    Allianz and the Commissioner accepted that if the relevant payments were unfair preferences within the meaning of s 588FA of the Act, then the liquidators were entitled to succeed against them.

29    Section 588FA(1) of the Corporations Act 2001 (Cth) (the Act) provides:

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 (even if someone else is also a party); 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.

30    For present purposes the word “transaction” is defined in s 9 of the Act to mean a transaction to which the company is party. The following examples of a “transaction” are then given:

(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;

…

31    Section 588FA states that a transaction is an unfair preference if, and only if, the company and the creditor are parties to the transaction and it results in the creditor receiving more from the company than would be received by the creditor if the creditor was required to prove for a debt in a winding up of the company. Nevertheless, in deciding whether a creditor has received an unfair preference, it is necessary to look at the “ultimate effect” of the “entire transaction” between the company and the creditor. Not every payment made by a company to a creditor in the six months preceding the company’s winding up need result in the giving of a preference. In Airservices Australia v Ferrier (1996) 185 CLR 483 Dawson, Gaudron and McHugh JJ said at 501-503 (citations omitted):

If a payment is part of a wider transaction or a “running account” between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be “decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact”.

As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.

Thus, where the payment is a step in a wider transaction, “its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference”. If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt that is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been in if the parties had so structured the transaction that the debtor paid for the new supply of goods instead of discharging the old debt. Thus, a customer does not prefer his or her banker to other creditors where, pursuant to an antecedent arrangement between the banker and its customer, the customer deposits money to meet a liability already incurred in respect of specific cheques that the banker has met on the faith of the arrangement. A court, exercising jurisdiction under s 122 of the Bankruptcy Act, does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority or advantage over the general body of creditors.

32    In that case the High Court was concerned with the operation of s 122 of the Bankruptcy Act 1966 (Cth) which was and still is expressed in different terms to s 588FA of the Act. Nevertheless, there is ample authority to establish that s 588FA should be interpreted in much the same way: see, for example, VR Dye & Co v Peninsula Hotels Pty Ltd (in liq.) [1999] 3 VR 201, [1999] VSCA 60; Beveridge v Whitton [2001] NSWCA 6; and McKern and Others v Minister Administering Mining Act 1978 (WA) (2010) 269 ALR 534, [2010] VSCA 140.

Did Allianz receive an unfair preference?

33    Both Mortlake and Allianz were parties to a transaction whereby Allianz received from Mortlake the amount of $56,000. It is clear that if Allianz had not received that payment, then it would have received less if it had proved for that amount in the winding up of Mortlake.

34    There is no suggestion in this case that Allianz gave anything in return for the payments it received. In particular, there is nothing to suggest that the payments to Allianz did anything other than extinguish a pre-existing debt.

35    In the circumstances I find that the payment of $56,000 by Mortlake to Allianz on 21 August 2007 was an unfair preference and that the liquidators are entitled to succeed in their claim against Allianz.

Did the Commissioner receive an unfair preference?

36    I am satisfied that Mortlake and the Commissioner were parties to transactions whereby the Commissioner received $70,000 from Mortlake. However, the Commissioner submitted that before the liquidators could succeed against him, they also needed to show that the payments to him constituted an “unfair preference” in the sense previously discussed. In this regard, the Commissioner submitted that the relevant payments were not unfair preferences because the relevant accounts were ultimately applied in reduction of Mortlake’s Superannuation Guarantee Account.

37    The underlying principle of the superannuation guarantee charge was explained by Barrett J in DP Excavation and Haulage Pty Ltd v Federal Commissioner of Taxation (2005) 54 ACSR 274. After referring to relevant provisions of the SGA Act his Honour said at para [20]:

If an employer does not voluntarily make in respect of an employee the specified minimum superannuation contribution, the employer becomes liable to pay an amount equal to that contribution to the Commissioner, together with interest and an administration charge; and the Commissioner, having received that aggregate, must apply all of it except the administration charge for the benefit of the employee in essentially the way that the employer would have applied it had the employer elected to make the contributions necessary to avoid the imposition of the charge.

38    The general rule is that all debts and claims proved in a winding up rank equally, and if the property of the company being wound up is insufficient to meet them in full, they must be paid proportionally: s 555 of the Act. Section 556(1) establishes exceptions to the general rule and requires that priority be given to various debts and claims. These include various costs properly incurred by the liquidator, provisional liquidator or administrator of the company being wound up. Some way down the list of such preferred debts and claims is sub-para (e) of s 556(1) which, subject to an exception in respect of so-called “excluded employees” (see s 556(1A)), gives priority to wages and superannuation contributions payable by the company for services rendered to the company by its employees.

39    Section 556(2) defines “superannuation contribution” to mean:

a contribution by the company to a fund for the purposes of making provision for, or obtaining, superannuation benefits for an employee of the company, or for dependants of such an employee.

It is common ground that the Superannuation Guarantee Account against which the Commissioner purported to apply the relevant amounts originally received into Mortlake’s Running Balance Account is a fund of the kind referred to in the definition of “superannuation contribution”. It is also common ground that there were no other debts or claims falling within s 556(1)(e) apart from those due to the Commissioner in respect of the superannuation guarantee charge payable by Mortlake. Counsel for the liquidators made this clear in his closing submissions.

40    The Commissioner’s argument for holding that he did not receive an unfair preference was put in a number of different ways. First it was said that in a hypothetical winding up as at the date he received each of the relevant payments, the Commissioner would have been entitled to priority over all other unsecured creditors because there were, as at that date, no other unsecured creditors entitled to a priority equal to or higher than that to which the Commissioner was entitled under s 556(1)(e) of the Act. Secondly, it was said that it had not been shown that the Commissioner received an unfair preference as a result of his receipt of the relevant payments because such payments were ultimately applied toward an unsecured debt that took priority over all other unsecured debts in existence at that time. It seems to me that these two ways of putting the argument give rise to what is essentially the same point.

41    In support of his argument, the Commissioner relied upon the decision of the Victorian Court of Appeal in Walsh v Natra Pty Ltd [2000] 1 VR 523. However, a fair reading of that decision does not support the Commissioner’s argument. It was certainly argued in that case that the Court was required to consider what the unsecured creditor who received the impugned payments would have received in a hypothetical winding up undertaken as at the date each such payment was received. However, it is clear that this argument was rejected by Phillips JA (at paras [31]-[33]) with whom Charles JA agreed (at para [56]). The case is authority for the proposition that the unsecured creditor’s likelihood of recovery by way of a distribution in a winding up is to be assessed in the context of the actual winding up rather than a hypothetical winding up postulated to take place at the time of the impugned transaction.

42    The Commissioner also submitted that if the impugned payments were made using money Mortlake borrowed from Antqip there could be no change in the net value of the assets that were available to meet the demands of other creditors. It followed, so the Commissioner argued, that he could not have received a preference.

43    In support of this argument the Commissioner relied upon what he said was a statement to that effect appearing in the passage of the judgment of Dawson, Gaudron and McHugh JJ in Airservices Australia at 501-503 to which I have previously referred at para [31] above. But when the particular statement relied upon by the Commissioner is read in context, it is apparent that their Honours were referring to the effect of payments that form part of a wider course of dealing as between the company and its creditor. Whether or not a payment made in such a context has the effect of giving the creditor a preference will depend upon the ultimate effect of the wider course of dealing upon the net assets of the company which are available to meet the demands of other creditors. The impugned transactions in this case do not form part of any relevant course of dealing. Hence, the particular statement relied upon by the Commissioner does not provide an answer to the liquidators’ claims.

44    What happened here was that Mortlake borrowed from one creditor to pay another creditor. The payments to the Commissioner made possible by that borrowing were applied toward a pre-existing debt. There was no enlargement or enhancement of the pool of assets available to satisfy the claims of Mortlake’s other unsecured creditors.

45    It is necessary, therefore, to look at the actual winding up of Mortlake which is still in progress. When this is done it is clear that the Commissioner would not have received by way of dividend $70,000 in respect of the superannuation charge debt if he had proved for it in the winding up instead of accepting the impugned payments as he did. The evidence establishes that there is little prospect of him receiving any dividend at all out of the winding up.

46    Once it is accepted that the Commissioner received $70,000 which he would not receive if he was instead to prove for that amount in the winding up of Mortlake, I think it follows that he has received an unfair preference. The fact that he may have obtained a different result if he had proven in a winding up of Mortlake at some earlier point in time is irrelevant.

47    In these circumstances, it is unnecessary for me to consider whether or not the Commissioner would have been entitled to the priority he claimed to be entitled to under s 556(1)(e). Either way, I am satisfied that each of the relevant payments to the Commissioner was an unfair preference.

48    The liquidators are entitled to orders requiring the respondents/defendants to pay the amounts of the unfair preferences to the liquidators together with interest from the date of demand. I shall direct the liquidators to bring in short minutes of order giving effect to my decision. I will hear from the parties in relation to costs.

Associate:

Dated:    29 February 2012