Advance Ship Design Pty Limited v DJ Ryan

Facts

1. On 11 October 2018, the ATO signed a creditor's statutory demand to the company stating that the company owed $777,139.85 "being the amount of the debt described in the Schedule". The Schedule described the debt as follows: (emphasis added) Running Balance Account deficit as at 11 October 2018 in respect of amounts due under the BAS provisions …, administrative penalties … and the general interest charge …, calculated up to and including 10/10/2018 … The statutory demand required the company to pay the debt within 21 days of service of the demand. The statutory demand was verified by an affidavit deposed by an employee of the Formal Recovery Section of the ATO at Parramatta. The employee deposed that she had access to the ATO's records in respect of the company, including the computer system which recorded information relating to the debt owing by the company. The employee deposed that she had inspected those records, which indicated that the debt of $777,139.85 was due and payable.
2. Also on 11 October 2018, the ATO issued a statement for the Integrated Client Account - Running Balance Account maintained by the ATO in respect of the company and sent the statement to the company at the address of, apparently, the company's accountant. The statement contained the following entries for October 2018: Process date Effective date Description of transactions Debits Credits Balance 1 Oct 18 1 Oct 18 Payment received $50,000 $724,854.25 4 Oct 18 1 Oct 18 Payment dishonoured $50,000 $774,854.25 11 Oct 18 10 Oct 18 General interest charge calculated from 29 Sep 18 to 10 Oct 18 $2,285.60 $777,139.85 11 Oct 18 10 Oct 18 Payment received $150,000 $627,139.85 11 Oct 18 STATEMENT CLOSING BALANCE - You are required to pay this amount immediately: $627,139.85

1. Another ATO employee, Mr Simpson, who is familiar with the ATO's system of recording transactions, deposed that liabilities, payments and credits for income tax accounts are recorded on an accounting system called the Integrated Core Processing System from two sources: 1. Information is entered manually by ATO employees based on information provided by taxpayers in their income tax returns and business activity statements. 2. Information is automatically recorded on the system when taxpayers lodge their returns or statements electronically. Importantly, information from either source is recorded in chronological order.
2. Mr Simpson examined the Integrated Client Account - Running Balance Account statement for the company and concluded, … a payment of $150,000 was made on 10 October. This payment has not been processed and was not visible on the account at the time the demand was issued. Subsequently the "payment received" of $150,000 from the Company was credited, also on 11 October 2018, reducing the amount owing to $627,139.85.
3. The company did not challenge the evidence of the ATO's witnesses. Nor did the company put on any evidence as to how the $150,000 payment was made; whether by electronic transfer, by cheque sent in the post, or otherwise. Nor did the company put on any evidence as to precisely when the $150,000 payment was made on 10 October 2018.
4. Having regard to the evidence, I find that on 11 October 2018 the ATO calculated the general interest charge owing in respect of the tax owed by the company as at 10 October 2018, giving rise to a balance owing of $770,139.85, and prepared the statutory demand and affidavit verifying the demand based on that figure. This was done before the payment of $150,000 was processed by the ATO. Also on 11 October 2018, after the payment was processed, the ATO sent to the company an Integrated Client Account - Running Balance Account statement recording these transactions.
5. On 12 October 2018, the company was served with the statutory demand. Presumably, soon afterwards, the company also received the Integrated Client Account - Running Balance Account statement via its accountant. It was readily apparent from the statement that the payment of $150,000 had been received by the ATO and credited to the company's outstanding indebtedness to the ATO. If there was any doubt on that score, the company's accountant surely could and would have dispelled it.
6. On 1 November 2018, the company commenced these proceedings, complaining, in short, that the statutory demand did not take into account the payment of $150,000. The company does not dispute its underlying indebtedness to the ATO. The ATO does not dispute that the company is entitled to be credited for the $150,000 and indeed credited the company for the payment on, it turns out, the same day that the statutory demand was issued. The ATO accepts that the company need only tender payment of $627,139.85 to satisfy the statutory demand but notes that the company has not done so in the 7 months since it was served with the demand.
7. Since 11 October 2018, the company has lodged further Business Activity Statements, made further payments and become liable for further amounts including interest. By March 2019, the balance of the company's account with the ATO was some $644,000.

Offsetting claim

1. The company submitted that it has an offsetting claim, being the $150,000 paid by the Company before the statutory demand was issued, "and since the statutory demand was issued". The affidavit in support of the application to set aside the statutory demand refers to the former but not the latter. It was not evident or discernible from the affidavit in support of the application that the debtor pointed to subsequent payments as offsetting claims: Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd (2011) 87 ACSR 1; NSWSC 1343 at [36]; Saferack Pty Ltd v Marketing Heads Australia Pty Ltd (2007) 214 FLR 393; [2007] NSWSC 1143 at [25]; In the matter of Australia Zhongfu Oil Gas Resources Pty Ltd [2012] NSWSC 1208 at [31]. Consequently, I am not prepared to have regard to payments made by the company since 10 October 2018, particularly where it is apparent that such payments were largely attributable to amounts declared by the company to be payable to the ATO in Business Activity Statements lodged since 10 October 2018.
2. The ATO accepts that the company is entitled to the benefit of the $150,000 payment processed on 11 October 2018 but submits that this does not amount to an "offsetting claim" as defined by section 459H of the Corporations Act 2001 (Cth), being "a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand". Rather, section 459H is intended to capture controversies between the debtor and creditor as to whether or not a demand should be reduced. A payment receipted by a creditor after issue of a demand does not constitute a "counterclaim, set-off or cross-demand" but is simply a payment which has reduced the debt claimed in the demand, leaving the balance due and payable. Payment of the balance will satisfy the demand. There is no need for the Court to vary the demand every time a company makes a payment towards the amount claimed in the demand.
3. Whilst the parties were not able to take me to any authority directly on point, I note that in a relevantly identical case, the ATO simply sought to amend the amount claimed in the demand to reduce it by the payment made: Vitalia Pty Limited v Deputy Commissioner of Taxation [2005] WASC 179 at [7] per Master Newnes. In Mayaman Development Pty Limited v TQ Constructions Pty Limited [2009] QSC 144, the creditor conceded that the demand was excessive for failing to take into account part payments made by the debtor before the issue of the demand and it was varied accordingly: at [6], [7(a)], [24] per Daubney J. Likewise in Apex Gold Pty Limited v Atlas Copco Pty Limited [2011] WASC 49, the creditor accepted that the debtor was entitled to offset a part payment made before the demand was issued: per Pritchard J at [15(1)], [16]. But the issue was not the subject of argument.
4. A not dissimilar problem arose under the Bankruptcy Act 1966 (Cth) in Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337; [1984] HCA 33, where the ATO issued a bankruptcy notice to Mr Walsh for some $23,000 but between the date of issue of the notice and service, Mr Walsh made a number of small payments at various branches of the ATO across Australia totalling $98.33. Mr Walsh applied to set aside the bankruptcy notice on the ground that the amount specified in the notice exceeded that in fact due. The High Court upheld the rejection of Mr Walsh's application. Gibbs CJ (with whom Mason, Brennan and Deane and Dawson JJ agreed) held that the amount must be correctly stated at the date of issue of the bankruptcy notice. At 340: The conclusion is satisfactory from a practical point of view since it is ordinarily within the knowledge of the debtor whether or not any payments have been made since the issue of the notice and the ability to invalidate a notice on the ground that payments were subsequently made opens the way to evasion. Although the notice in form requires payment to be made after service it is apparent that a payment made before service, but after the issue of the notice, must be taken into account in deciding whether there has been compliance with the requirements of the notice ...
5. In the case at hand, the debt as described in the statutory demand was correct at the time it was issued, being: Running Balance Account deficit as at 11 October 2018 in respect of amounts due under the BAS provisions …, administrative penalties … and the general interest charge …, calculated up to and including 10/10/2018 … The statutory demand defined the debt by reference to the "Running Balance Account deficit" at an identified point in time. On the evidence, the "Running Balance Account deficit" when the demand was issued was, in fact, $777,139.85. The description of the debt did not suggest that the "Running Balance Account deficit" captured payments received but not entered into the account, but rather, the balance of the entries which had been entered at the point in time described in the demand.
6. The problem seems to me to be relevantly the same as that considered by the High Court in Walsh. So too here, whilst the statutory demand required payment of the debt within 21 days of service, obviously any payment made after issue of the demand must be taken into account in deciding whether there has been compliance with the requirements of the demand. So much is accepted by the ATO. Beyond the payment of $150,000, the debtor did not attend to payment of the remaining $627,139.85 within 21 days of service or at all in circumstances where the debtor does not dispute that the balance is owing.
7. If I am wrong about this, then I consider that the ATO's submission in respect of "offsetting claim" is correct. Again, whilst there is no authority squarely addressing the argument made, a "claim" is the assertion of a right: Osborn's Concise Law Dictionary (M Woodley, ed., 12th ed., Sweet & Maxwell, 2013). It involves the notion of a contention by a debtor to have a right against the creditor which the creditor does not accept. As Barrett J described it in Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2010] NSWSC 1017 at [13]: The essence of the 'offsetting claim' concept is the ability of the claimant to assert in an offensive way a right which, if found to have substance, will result in the actual recovery by that claimant of a sum of money which, if not precisely quantifiable to the last dollar and cent, can be seen to be of a fairly quantifiable or calculable amount. That hardly describes the facts at hand, where the debtor and creditor are in furious agreement that the payment of $150,000 must be taken into account when determining the amount owing to the ATO.
8. Further, an offsetting claim must exist at the date of the hearing of an application to set aside a statutory demand: Maniotis v Valimi Pty Limited (2002) 4 VR 386; [2002] VSCA 91 at [44]; Advance Ship Design Pty Limited v DJ Ryan (1995) 16 ACSR 129 at 135-6; Collier Nominees Pty Limited v Consolidated Constructions Pty Limited (Santow J, Supreme Court of New South Wales, 3 July 1998, unrep., BC9803056 at 13). Whilst the company may have had an offsetting claim against the ATO for a, likely, short period of time on 11 October 2018 between when the statutory demand was issued and the payment of $150,000 was processed, the claim ceased to exist once the company had been given full credit for the payment.
9. Consequently, the company's claim to set aside the statutory demand by reason of an offsetting claim fails. It is not necessary to consider whether the statutory demand should be varied.

Defect

1. Section 459J of the Corporations Act provides: (1) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. (2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect. Relevantly, section 9 of the Corporations Act defines "defect", in relation to a statutory demand, to include "a misstatement of an amount or total".
2. The company says the demand is defective as the debt claimed is incorrect and substantially in excess of that disclosed in the Integrated Client Account - Running Balance Account statement in respect of the company as at 11 October 2018. If the demand is not set aside, a substantial injustice will be caused to the company by reason of a defect in the statutory demand as it has had to apply to set aside the statutory demand in order to avoid a situation of deemed insolvency and incurred legal costs as a consequence.
3. The ATO submits that the demand correctly identified the amount owing as it appeared on the ATO's records as at 10 October 2018 and thus the debt was not overstated, such that there was no defect. For the reasons given at [17], I consider this submission to be well made, as the demand correctly stated the amount of the debt by reference to the "Running Balance Account deficit" at an identified point in time, which, on the evidence before me, was correct.
4. In any event, substantial injustice was not caused by any defect as the company was informed shortly afterwards that the "Running Balance Account deficit" had been reduced by $150,000 on crediting the company's payment, such that the balance owing on the demand was $627,139.85. Accordingly, this aspect of the company's application to set aside the statutory demand also fails.

Some other reason

1. The company submitted generally that the legislative scheme providing for the issue of statutory demands should not be used as a debt collection mechanism, and it is said that the ATO is using it for debt collection here: see Equipped Constructions Pty Limited v Form Architects Pty Limited [2006] NSWSC 500 per Austin J. It was submitted that there is no suggestion that the company is insolvent but rather that subsequent payments by the company suggest otherwise.
2. I do not think that the first submission is well founded. As the High Court explained in Deputy Commissioner of Taxation v Broadbeach Properties Pty Limited (2008) 237 CLR 473 at 496; [2008] HCA 41 per Gummow ACJ, Heydon, Crennan and Kiefel JJ (with whom Kirby J agreed): The use by the Commissioner of the statutory demand procedure in a winding-up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue. … Part 5.4 contemplates that the "debt" in respect of which a statutory demand may issue will include "tax debts"…
3. Nor do subsequent payments by the company necessarily suggest solvency in circumstances where those payments, by and large, were for further liabilities for subsequent BAS statements together with modest reductions of a substantial tax debt. The Integrated Client Account - Running Balance Account statement indicates that since February 2016 the company has steadily increased its indebtedness to the ATO from some $60,000 to some $644,000 by March 2019.
4. The ATO referred me to In the matter of UGL Process Solutions Pty Limited [2012] NSWSC 1256 at [43], where Black J adopted Santow J's observations in First State Computing Pty Limited v Kyling (1995) 13 ACLC 939 that a statutory demand could be set aside under section 459J(1)(b) by reason of a substantial overstatement in the amount claimed, where a statutory demand had been so grossly inflated as to comprise matters which it should have been obvious from the outset were in genuine dispute between the parties at the time the demand was served, such that an order under section 459J(1)(b) setting aside the demand may be required to prevent an abuse of the statutory demand regime. For the reasons outlined, this is clearly not such a case. Even if the demand overstated the debt, which I do not accept, there can be no suggestion that the ATO should have known that a payment had been made which would reduce the amount owing such that the demand may have been overstated.

Time to pay

1. Section 459F(2)(a) provides that, if a company applies to set aside a statutory demand, then the period for compliance is extended to seven days after the application is finally determined, unless the Court further extends the period for compliance.
2. The company sought an extension of time in which to pay the statutory demand to 21 days. The ATO opposed the company being given more than that the seven days accorded by section 459F(2)(a)(ii) as the company had not put on any evidence as to why it needs more than seven days; the company had had the benefit of seven months in which to pay the undisputed portion of the demand but has not done so; there was no evidence to indicate that any further period of time would allow the company to better attend to payment; the time allowed under the statutory demand regime forms part of the important protective function for the public at large by ensuring that insolvent companies do not continue to trade.
3. I am not prepare to accede to the company's request for additional time in which to pay the varied demand as the ATO's submission that the taxpayer has already had seven months is well taken. Further, the company's running balance of its obligations to the ATO are high and the concerns raised by the ATO as to the company's solvency may prove to be well-founded. In that event, it is in the interests of all of the other creditors of the company that a liquidator be appointed if appropriate sooner rather than later.
4. The ATO expressed a general concern that taxpayers may seek to avoid compliance with a statutory demand by making a part-payment after the issue of the demand, filing an application to set it aside on that basis, and thereby obtaining a lengthy extension of time for payment until the Court determines the application. It seems to me that the ATO may address this problem by issuing a new statutory demand which takes into account any payments received or simply confirming in open correspondence that only the nett amount owing need be paid to satisfy the demand. The ATO could propose orders be made by the Court on the first return of the Originating Process to record that only the nett amount is payable. This may abbreviate the lifespan of such proceedings.

ORDERS

1. The company has failed on both bases of its application and thus should pay the ATO's costs of these proceedings. I make the following orders: 1. Originating Process filed on 1 November 2018 is dismissed. 2. Plaintiff to pay the defendant's costs of the proceedings.

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. Decision last updated: 14 May 2019