Nicholas Paul Driver liquidator of Tilse Building Pty Limited (In liquidation) v Commissioner of Taxation & Anor

PRIESTLEY JA: I agree with Meagher JA.

MEAGHER JA : The plaintiff Mr Driver (the present appellant) is liquidator of a company called Tilse Building Pty Limited (in liquidation). He is suing the respondent Commissioner for declarations that the payment of two sums of money, one of $10,000 and the other of $84,425.40, to the Commissioner are void as against the liquidator on the ground that they are insolvent transactions within s.588FE of the Corporations Law , and orders directing repayment of those amounts. Before Windeyer J he succeeded as far as the $10,000 is concerned, and his Honour’s orders in this regard are not under challenge. However, his Honour declined to make similar orders in respect of the $84,425.40 figure, and his Honour’s judgment in this respect is under attack.

The $84,425.40 is in fact composed of two figures, $62,517.40 and $21,908.

Tilse Building was a company primarily engaged in the business of home building and the construction and repair of schools and churches. By 1993 it 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. In addition, it had problems with the Australian Taxation Office. It did not always lodge Group tax returns when due in respect of its employees, nor always lodge Prescribed Payments tax returns when due in respect of its sub-contractors. Nor did it always pay Group tax or Prescribed Payments tax, or its own tax liabilities, by the due date.

In July 1994 the Commissioner served a creditor’s statutory demand on the Company.

In April 1995 the appellant Mr Driver was appointed the company’s voluntary administrator, and in May 1995 its liquidator. By this time, 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. It had been insolvent since at least 29 October 1994.

It should be mentioned that, in some of its transactions, the company seems to have been a head contractor, and in others a subcontractor.

It should also be mentioned that, on some occasions, and apparently because of incompetent financial advice, the company managed to overpay its tax liabilities.

In August 1994 the Company lodged a request for an amended assessment in respect of its 1991 income tax return as its records had overstated the work-in-progress value, and thus the total income. On 16 December 1994 an amended assessment was issued by the Commissioner for a credit of $62,517.40. The Commissioner then applied this money to the company’s Prescribed Payments tax liability. Its authority to do so was s.172 of the Income Tax Assessment Act 1936 , sub section (1) of which is in the following terms: “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 section 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."

In February 1995 the Company lodged another request for an amended assessment in respect of its 1993 income tax return, and was again successful, obtaining a Prescribed Payments tax credit of $21,908. This sum was then applied by the Commissioner to tax liabilities owed by the company pursuant to s.221YHG(2) of the Act, which is in the following terms: “(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 of part payment of that other tax.”

Whilst a great deal of attention was paid, during the hearing of the appeal, to the minutiae of the composition of the company’s debts to the Commissioner and the mechanics of the Commissioner’s application of the newly emerging credits towards the discharge of those debts, I cannot see that any of these matters arise in this appeal.

As is reflected both in his Honour’s judgment and in the written submissions of each counsel, it was common ground (a) that the amended assessments raised credits in the company’s favour in the amounts I have mentioned, (b) that at the time each credit came into existence there was or were a debt or debts equal to, or in excess of, the credits to which the company was entitled, and (c) the Commissioner applied the credits so as to reduce or extinguish the debts. The only question the Court was asked to answer was whether the reduction or extinguishment amounted to an illicit preference.

In order to determine this question it is necessary to take into account certain provisions of the Corporations Law. These are as follows: “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 and 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.”

The definition of the word “transaction” occurs in s.9 of the Act. It is: “transaction”, in Pt 5.7B, 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;”

Although the word “transaction” must cover a vast field, for the purposes both of the definition and for the purposes of s.588FA(1)(a), it is necessary for a Company to be a party to the transaction. As the matter was dealt with by his Honour, the question was whether the action of the Commissioner by applying the credits to the debts constituted what s.588FC terms an “unfair preference”. His Honour held that it obviously did not, as the Company was not a party to that transaction. In this regard his Honour followed Emmet J’s decision in Commissioner of Taxation v Macquarie Health Corp (1999) 17 ACLC 171. In my respectful view, this must be correct.

A more difficult submission is whether the course of action commencing with the Company’s request and ending in the Commissioner’s application of the credits to the debits of the company is a “transaction”. In this regard, reliance was placed on the decision of the Full Federal Court in Re Emmanuel (No 14) Pty Limited, Macks v Blacklaw (1997) 147 ALR 281. But I do not see that that case does the work which the appellant Company wants it to do. That case illustrates that A is a “party” to the payment of money to B if he promises that his associate will actually make the payment. That, if I may say so, is the plainest common sense. But it is a long way from treating a taxpayer who requests a re-assessment as a “party” to the Commissioner’s behaviour after the re-assessment is made.

I would dismiss the appeal with costs.

SHELLER JA: As the result of amended assessments issued by the respondent Commissioner, the liability to tax of Tilse Building Pty Limited was reduced by $84,425.40. The Commissioner applied these credits against the company’s unpaid Prescribed Payments Scheme tax liability and other tax liabilities owed by it. The appellant liquidator asked the Court to declare that the Commissioner’s applications of these credits were voidable transactions within the meaning of Pt 5.7B Div 2 of the Corporations Law and to make orders under s588FF of the Law.

On 11 August 1999 Windeyer J held that the Commissioner’s dealing with the credits pursuant to powers found in ss172(1) and 221YHG(2) of the Income Tax Assessment Act 1936 (Cth) did not constitute voidable transactions. In passing, Windeyer J remarked that he had little doubt that such applications of the credits would have been “undue preferences” under s451(1) of the Companies (NSW) Code and that the result in this case gave the Commissioner an advantage which he ought not to have. In his Honour’s opinion the unfair result should be remedied by appropriate legislation.

This is an appeal against Windeyer J’s decision. However, I agree with his Honour’s judgment and detect no error in it despite the careful arguments put on the appellant’s behalf. I have had the benefit of reading the reasons for judgment prepared by Meagher JA. I agree with what his Honour says and the order he proposes.