Commissioner of Taxation v Paditham [2010] FCA 334 | Case summary

REASONS FOR JUDGMENT 1 Strategy New South Wales Pty Limited (in liquidation), was formerly known as Vensys Australia Pty Limited and Sapora Australia Limited, ACN 098 228 847 ('Vensys'). The company changed its name to Vensys Australia Pty Limited on 3 April 2006 and at all material times, for present purposes, bore that name. 2 On or about 7 January 2008 the Commissioner of Taxation ('the Commissioner') served a statutory demand under s 459E(5) of the Corporations Act 2001 (Cth) ('the Act') upon Vensys claiming $80,028.45. 3 Under s 459C(2)(a) of the Act the Court 'must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made … the company failed … to comply with a statutory demand …'. The presumption for which s 459C(2)(a) provided operated 'except so far as the contrary is proved for the purposes of the application'. 4 Vensys failed to comply with the statutory demand (see s 459F) whereupon proceedings NSD 581 of 2008 were instituted by the Deputy Commissioner of Taxation against Vensys on 24 April 2008 seeking an order that the company be wound up in insolvency (see ss 459A, 459P and 459Q of the Act). 5 As it transpires Vensys was not wound up by the Court pursuant to the Originating Process filed in the winding up proceedings instituted by the Deputy Commissioner of Taxation, even though those proceedings were before the Court on numerous occasions, firstly before Registrar Hedge on 6 June 2008 and thereafter before Justice Emmett on 20 June 2008, 27 June 2008, 1 August 2008, 18 August 2008, 25 August 2008, 28 August 2008, 29 August 2008, 10 October 2008, 16 October 2008, 23 October 2008, 24 October 2008, 31 October 2008, 7 November 2008, 13 November 2008, 19 November 2008 and 28 November 2008. 6 It would appear that the Court's file in relation to proceedings NSD 581 of 2008 has been misplaced. However, copies of a number of documents which were before the Court in those proceedings have been tendered as evidence in the current proceedings NSD 394 of 2009. Exhibit 2 in the current proceedings comprised two folders of copy documents filed in proceedings NSD 581 of 2008 which have been divided by some 26 tabs. Exhibit 3 was a copy of an expert report of William James Hamilton of 18 June 2008 in respect of Vensys. 7 On 23 October 2008 Vensys appointed William James Hamilton and Pino Fiorentino as administrators of the company pursuant to s 436A of the Act. 8 On or about 23 October 2008 Vensys ceased to be legally represented in the winding up proceedings whereupon Emmett J granted leave to Venkatesh Paditham, its sole director, to appear for Vensys in those proceedings. 9 On 4 February 2009 a meeting of creditors, convened by the administrators under s 439A of the Act, was held at which a resolution was passed that the company be wound up (see s 439C(c) of the Act). In accordance with s 446A of the Act the company was taken to have been wound up voluntarily. The administrators became the liquidators for the purpose of winding up the affairs and distributing the property of the company (see s 499(2A)(b) of the Act). 10 The company having been wound up voluntarily on 4 February 2009, Emmett J proceeded to order that the Originating Process in the winding up proceedings be dismissed, on 6 February 2009. 11 Under s 588FE(2) of the Act transactions were voidable if they were insolvent transactions of a company that was being wound up and were entered into, or an act was done for the purposes of giving effect to such transactions: '(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.' 12 Section 588FF of the Act empowered the Court to make an order on the application of a company's liquidator directing a person to pay to the company an amount equal to some or all of the money that the company may have paid under a transaction that was voidable because of s 588FE of the Act. 13 On 25 August 2009 the Court ordered, pursuant to s 588FF of the Act, that the Commissioner of Taxation pay to the plaintiffs the sum of $141,000.00 together with pre-judgment interest on the said sum of $4,177.85. 14 It is common ground that three separate amounts totalling $141,000.00 were paid by Vensys to the Commissioner of Taxation and that at the time when each of the payments was made Vensys was insolvent. These comprised: (a) an amount of $100,000.00 paid on 16 May 2008; (b) an amount of $25,000.00 paid on 27 June 2008; and (c) an amount of $16,000.00 paid on 15 October 2008. 15 On 25 June 2009 the Commissioner of Taxation filed an interlocutory process seeking an order that the respondent named therein, Venkatesh Paditham, a director of Vensys at all material times, pay to the applicant Commissioner an amount said to be payable by him to the Commissioner under s 588FGA(2) of the Act. 16 Section 588FGA of the Act applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under, relevantly, a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1963 (Cth). Section 588FGA(2) provided: 'Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order'. 17 It is common ground that out of the amount of $100,000.00 paid by Vensys to the Commissioner of Taxation on 16 May 2008 $77,010.58 was applied to group tax or interest tax withholding liabilities of Vensys, in respect of June 2005, September 2005, December 2005, March 2006, June 2006 and September 2006. In addition it is common ground that $2,281.83 out of the interest of $4,177.85 was attributable to those liabilities. 18 It is also common ground that $15,536.42 out of the amount of $25,000 paid by Vensys to the Commissioner of Taxation on 27 June 2008 was applied to group tax or interest tax withholding liabilities of Vensys in respect of September 2006. Furthermore it is common ground that $460.35 was that proportion of the amount of $4,177.85 paid by the Commissioner by way of interest on the sum of $141,000 referable to the said sum of $15,536.42. 19 It is also common ground that $13,709.56 out of the amount of $16,000.00 paid by Vensys to the Commissioner of Taxation on 15 October 2008 was applied to group tax or interest tax withholding liabilities in respect of December 2006. Furthermore it was common ground that $406.22 out of the said amount of $4,177.85 paid by the Commissioner of Taxation by way of interest was paid in respect of the said sum of $13,709.56. 20 In the foregoing circumstances the Commissioner seeks payment by Mr Paditham of $106,256.56 ($77,010.58 plus $15,536.42 plus $13,709.56) by way of indemnity under s 588FGA(2) of the Act and, in addition, $3,148.40 ($2,281.83 plus $460.35 plus $406.22) being the relevant fraction of the total interest of $4,177.85 paid by the Commissioner in respect of the component amounts applied to group tax or interest tax withholding liabilities, totalling $106,256.56 aforesaid. 21 In the foregoing circumstances, the Commissioner's total claim against Mr Paditham is for $109,404.96 together with interest up to judgment. 22 Subject to matters of arithmetical calculation, the sole issue for determination in the present proceedings is whether: (a) as at 16 May 2008 (b) as at 27 June 2008 (c) as at 15 October 2008 Mr Paditham had reasonable grounds to expect, and did expect, that Vensys was solvent at that time and would remain solvent even if it made the relevant payment to the Commissioner of Taxation which it did make on the relevant day. 23 Section 588FGB(3) of the Act provided, relevantly in respect of claims under s 588FGA(2): '588FGB(3) It is a defence if it is proved that, at the payment time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it made the payment.' 24 The onus of proving, inter alia, the relevant reasonable grounds fell upon Mr Paditham. 25 An 'expectation' of solvency within the meaning of s 588FGB(3) requires a higher degree of certainty than 'mere hope or possibility' or 'suspecting'. The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot hide behind ignorance of the company's affairs which have been of his own making (see per Austin J in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 at [67]). 26 In my opinion Mr Paditham has failed to prove that at the time when the payments or any of them were made by Vensys to the Commissioner of Taxation, he had reasonable grounds to expect, and did expect, that Vensys was solvent at that time and would remain solvent even if it made the relevant payment. 27 By virtue of s 95A(1) of the Act a person [which includes a body corporate] 'is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable'. Mr Paditham understood the test. He said that his understanding of solvency was 'the ability to pay debts as and when they fall due'. 28 Late in the day counsel for Mr Paditham made a fall-back application for relief in accordance with s 1318 of the Act. That application was opposed by counsel for the Commissioner who indicated that if leave were to be granted to Mr Paditham to allow him to make an application for relief under s 1318, he would need further time to consider his client's position in relation to it. 29 In my opinion relief could not be granted to Mr Paditham in the circumstances of this case. Firstly, s 1318 is only available in a civil proceeding for 'negligence, default, breach of trust or breach of duty' in, relevantly, Mr Paditham's capacity as an officer of Vensys. It does not seem to me that the proceedings brought by the Commissioner for indemnity answer the description of being a civil proceeding for 'default' as an officer. Secondly, it does not seem to me that, having regard to all the circumstances of the case, Mr Paditham ought fairly to be excused for any default on his part even if it were assumed, favourably to him, that he had 'acted honestly' and that his failure to indemnify the Commissioner constituted a 'default'. In my opinion Mr Paditham's application for relief under s 1318 of the Act should not be entertained in the circumstances of this case. 30 In his Ex tempore reasons for judgment in Palmer v Commissioner of Taxation [2006] NSWSC 1253 White J said at [20], in circumstances where the relevant director of Stevenson Plumbing Services Pty Limited (in liq), Mr Stevenson, had appeared before his Honour in person: '[20] Mr Stevenson did not seek an order under s 1318 of the Corporations Act for the grant of relief from his liability under s 588FGA on the ground that he had acted honestly and ought fairly to be excused. … Although the matter was not argued, I have considered for myself whether he could be entitled to relief under that section. The section empowers the Court to relieve persons specified in s 1318(4), including directors, if a civil proceeding is brought against them for "negligence, default, breach of trust or breach of duty". The claim against Mr Stevenson under s 588FGA was not of that kind. It arose simply from the fact of his holding office as a director and the unavailability of the defences in s 588FGB. …' 31 In Hall v Poolman (2008) 65 ACSR 123 the correctness of White J's observations concerning s 1318 were challenged but not determined by Palmer J. Hall v Poolman concerned the failure of the Reynolds Wine and Vineyards group of companies. At [504] Palmer J said: 'Even if a defence under s 1318 were available in law, it would have failed. …' 32 The legislative history of s 1318 was traced by Austin J in Australian Securities and Investments Commission v Vines (2005) 65 NSWLR 281 at [10] et seq; see also Lawson v Mitchell (1975) VR 579 at 589 et seq, and Deputy Commissioner of Taxation v Dick (2007) 242 ALR 152 ('Dick') at [26]-[46]. 33 The reach of s 1318 of the Act was the subject of extensive consideration in Dick. At [93] Santow JA opined that the Court's power to excuse a person to whom s 1318 applied 'for' negligence, default, breach of trust or breach of duty in a relevant capacity was equivalent to 'in respect of' and thus quite a wide-reaching power (at [93]). 34 However, the intended operation of s 1318 of the Act must be decided primarily by reference to its own terms and, in the case of a director, those of the provisions imposing a liability in relation to which it is sought to be applied (per Basten JA in Dick at [142]; see also per Spigelman CJ at [55]). 35 Given the inclusion in s 588FGB of the Act of discrete defences to claims for the recovery from a director of an amount under s 588FGA(2), it is unlikely that Parliament intended that s 1318 could operate so as to diminish the entitlements of the Commissioner. The statutory scheme in respect of voidable transactions contained in Division 2 of Part 5.7B of the Act is inconsistent with an intention to allow a court to exercise a broad discretionary power to grant relief to a director in circumstances where Division 2 has otherwise imposed liability, subject to its own regime of defences. (see per Basten JA in Dick at [142]-[145] and [152]; see also per McDougall J in Deputy Commissioner of Taxation v Keck (2006) 63 ATR 310 at [44]). 36 In his evidence in chief Mr Paditham gave evidence that he had an expectation that Vensys was solvent when the $100,000 payment was made by Vensys to the Commissioner on 16 May 2008 and that it would remain solvent if it paid the amount in question to the Commissioner. When asked to indicate what the grounds were upon which he had that expectation Mr Paditham said: 'In a valuable business with growing company along with goodwill and had blue chip customers who are paying on time, and the receivables were growing - we didn't have any issues with the clients paying invoices on time. I had very highly experienced consultants, and I was also dealing with the demand area of Oracle technologies. The market was absolutely growing and there was huge demand for Oracle skills, and our relationship with Oracle, and prospective clients, and HTC - sale of business to HTC. Apart from that, I'd been communicating on dealing with prospect buyers and venture capital companies, which made me confident and I expected that it was a temporary solution, for a company like us, as we grew very quickly, to control the situation, and even though we paid ATO we would remain solvent.' 37 When asked what his expectation was as at 16 May 2008 as to how Vensys was going to pay the balance of the money owed by it to the Commissioner Mr Paditham responded: 'I had a valuable asset that could be converted into a sale, and that asset was in demand at that point in time, and I had interested buyers, and I expected, based on my experience in the Oracle market, for companies to come in and buy us could pay all the debts to the Commissioner of Taxation.' 38 Vensys was itself an Oracle partner. 39 Mr Paditham said that prior to 16 May 2008 he had learnt that other companies which were 'Oracle partners' were being acquired within the Australian region. He instanced the ASG Group, based in Perth, which had bought two companies to grow organically at that point of time. His understanding was that those companies had been acquired for close to $7 million. 40 Mr Paditham gave evidence that he had formed a view that the business of Vensys had a value of around $3 million as at 16 May 2008. 41 In relation to the payment of $25,000 made by Vensys to the Commissioner of Taxation on 27 June 2008, Mr Paditham gave evidence that when he caused that payment to be made he expected that Vensys was solvent and would remain solvent if the payment was made. 42 When asked what his grounds were for that expectation he was asked whether they were the same as the grounds for his expectation in respect of the payment made on 16 May 2008. His response was in the affirmative. He said 'They were part of those grounds' and added a reference to periodic payments that he said had been made into the trust account of Cutler Hughes and Harris at the rate of $25,000 per fortnight and ended up totalling $177,846. He said that these payments had been made fortnightly and 'on time'. A further additional ground advanced by Mr Paditham for his expectation as at 27 June 2008 was the report of Mr William James Hamilton, who along with Mr Pino Fiorentino, became one of Vensys' administrators on 23 October 2008. Mr Paditham claims that he also relied upon the numerous adjournments of the winding up proceedings before Emmett J in relation to which he said: 'Apart from this I just Emmett J allowed the company to trade on, on the best interests of creditors, looking at the potential sale of the business and I was honouring all those commitments and my undertakings.' 43 In relation to the payment of $16,000 made by Vensys to the Commissioner on 15 October 2008, Mr Paditham gave evidence that he expected that Vensys was solvent at that time and that it would remain solvent even if the payment was made. The grounds of his expectation were said to be the matters that constituted the grounds for his expectation in respect of the payments made on 16 May 2008 and 27 June 2008. When asked whether he had any other grounds for forming his expectation on 15 October 2008, Mr Paditham paused for a long period of time. He then gave the following evidence: 'Judge: '… I would be assisted by knowing … it's quite a long time from 27 June to 15 October , did you sense that things were getting better or getting worse in that period, in terms of your likely ability to pay your debts as they fell due; that is to say, Vensys' debts?' Paditham: 'It was getting better … because of the business was growing and there were a lot of real prospect opportunities for Vensys and it has been recognised to be the national partner of Oracle.' Judge: 'When you say the business was growing, what do you mean by that?' Paditham: 'We had contracts - more contracts in place with Oracle Corporation, because of demand, which was even greater than the first and second expectation … . So that made me to believe if the sale goes through I could pay the Commissioner and also outstanding payments to other creditors, apart from the money held in Cutler's trust account that could satisfy all those payments. That's all.' 44 When cross-examined by counsel for the Commissioner it was suggested to Mr Paditham that he had been making up his account as he went along. He denied that this was the case. 45 It was suggested to Mr Paditham that certain of the periodic payments which he made into the Cutler Hughes and Harris trust account were paid late in breach of the undertakings which he had given to the Court in relation thereto. He conceded that one payment was late by two days in breach of the undertaking given to the Court, but this does not seem to me to be a matter of any great moment. 46 It seems to me that Mr Paditham confused his perception of value, primarily in respect of the goodwill of the business of Vensys, with solvency. In providing grounds for his expectations, he did not really address Vensys' current and other liabilities, nor did he address how or when the company proposed to meet those liabilities. Whatever Vensys' business may have been worth, free from fire-sale pressures, seems to me to be quite irrelevant in the context of its current liabilities that were long overdue for payment. 47 Under cross-examination Mr Paditham acknowledged an awareness as at 16 May 2008 that Vensys had debts due to the Australian Taxation Office from 2005 that still had not been paid as at May 2008. He acknowledged that Vensys had been unable to pay the tax debts as and when they fell due right through until 16 May 2008. He also acknowledged that as at that date three business activity statements were overdue for lodgement by Vensys. 48 Mr Paditham acknowledged that a statutory demand had been served on Vensys in January 2008 and that it did not have sufficient funds to enable the statutory demand to be met within the requisite period of time allowed for payment to avoid a statutory presumption of insolvency under the Act. 49 As it transpired the payment of $100,000 on 16 May 2008 was made in somewhat unusual circumstances. Firstly the payment was made shortly after the service of a Director Penalty Notice on Mr Paditham in early May 2008. In response to that notice Mr Paditham had in mind Vensys making a payment to the Taxation Office of $247,805. 50 Mr Paditham's evidence was that two cheques of Vensys were handed over to Mr Luke Bradshaw of the Australian Taxation Office on or about 16 May 2008 to meet Vensys' liability, to which the Director Penalty Notice which had been served upon him, related. When asked why the company gave two cheques instead of one, Mr Paditham's response was: 'At that point of time we had enough balance to pay the $100,000 and the remaining payments we were expecting from the clients. I was trying to get overdraft facility from the bank at the same time, before the cheque got dishonoured.' As it transpires the cheque for $100,000 was met on presentation, but the second cheque for $147,805 was dishonoured. Mr Paditham's evidence was that, had he drawn one cheque for $247,805, his expectation was that it would be dishonoured. That was why he split the total payment into two cheques so that one would be cleared and the other one might be cleared. 51 Mr Paditham opined that Vensys was solvent as at 16 May 2008 because it was in a position to pay all its debts, both historical and current, as and when they fell due. When asked to address how he expected that Vensys could pay its historical debt, which it was conceded by him to be already overdue, he said: 'If the company was sold, theres value to be realised, substantial value, because of the goodwill and the value of the business I was operating in, that could take care of the payments to all the creditors, including the Commissioner. …' 52 Mr Paditham conceded that Vensys' ability to pay its historical debt was dependent upon the business of Vensys being sold and that without a sale the company was insolvent. 53 Mr Paditham acknowledged that as at 16 May 2008 nobody had offered to pay any particular sum of money for Vensys. At the time of that payment all that Mr Paditham had was a 'hope of being able to organise the sale'. 54 In re-examination Mr Paditham indicated that there were parts of his evidence which, having read it, he sought to correct. He identified, amongst other passages, his last mentioned evidence. He indicated that he wished to qualify or correct his earlier answer. When asked what he wished to add, correct or qualify he said: 'During May 2008, I had emails to prospective purchasers to sell the business on three different options. One is getting an equity or working capital; selling this - sale of the business, plus 100 per cent buy out. Those evidences are in my exhibit which was sworn on 18 Jan 2010 your Honour. So I would like to characterise it was not a hope, but it was my expectation which has already occurred at that point because already I had those correspondence as an exhibit submitted to your Honour.' 55 Insofar as Mr Paditham sought to change his evidence in re-examination to convert a 'hope' into an 'expectation', I reject his evidence. Whilst I found Mr Paditham to be an engaging individual, it occurred to me that he brought a degree of shrewdness to some of his evidence which belied his otherwise seemingly truthful answers. I was far from impressed by his endeavours to change his evidence in the course of his re-examination. 56 On 5 June 2008 a 'Letter of Intent' was apparently sent by HTC Global Services (Australia) Pty Ltd ('HTC Australia') on the letterhead of 'HTC global services, inc.' to 'Vensys Consulting' which I have understood to be a reference to Vensys. The copy of the Letter of Intent included in Mr Hamilton's expert report bears a signature above the typed words 'Mudumby V Narasimhacharya' as director of HTC Australia and also Mr Paditham's signature as a director of 'Vensys Consulting' below the words 'ACCEPTED AND AGREED'. HTC Australia's letter of 5 June 2008 included: 'Acquisition of Vensys Consulting: Letter of Intent Dear Mr. Venkatesh Paditham, Based on our discussions and exchange of communications, we would like to provide you with our preliminary, non-binding offer to acquire the entity and all of the assets of Vensys Consulting …. HTC [Australia] … will not be assuming any of your liabilities, except as specifically agreed to by HTC [Australia] in writing. This offer is contingent upon the assumptions described below and the negotiation subsequent to 'Due Diligence' and execution by the parties of a detailed Purchase Agreement and related documents. 1. Price: The aggregate consideration for purchase of all assets, existing contracts and business of Vensys will be arrived at by applying the multiple of EBITDA (earnings from your business operations before interest, taxes and depreciation) method as follows: The aggregate consideration will be a sum of 4.75 times EBITDA, based on audited financial statements for the year ending 30th June 2009. The consideration will be paid as follows: (a) Initial down payment: A sum not exceeding A$600,000 … conditional on it being established during the due diligence that adjusted EBITDA for the period 1st July 2007 to 31st May 2008 is not less than A$100,000, and payable upon executing the purchase agreement. (b) Installment 1: 50% of aggregate consideration less initial down payment, conditional on achieving the agreed revenue targets for 2009, and payable one year after the date on which initial down payment was made. (c) Installment 2: 50% of aggregate consideration less initial down payment, conditional on achieving agreed revenue targets for 2010, and payable one year after date on which Installment 1 was paid. 2. Assumptions: HTC [Australia]'s offer is based on numerous assumptions, including: [12 assumptions were then recorded] … 4. Due Diligence: HTC [Australia] is prepared to commence due diligence immediately and, assuming normal turn-around times, estimates that it will need three to four weeks to complete the process. HTC may choose to use an outside firm to conduct the Due Diligence in order to complete the transaction. 5. Public Announcements: Vensys will not make any announcement of the proposed transaction contemplated by this letter of intent prior to the execution of the Purchase agreement without the prior written approval from HTC [Australia] … 7. Contacts: All questions concerning this non-binding preliminary offer should be directed to David Chellappa, Associate Director-Business Development, HTC-Australia or Chary Mudumby, Director, HTC-Australia and Vice President HTC Global Services. HTC [Australia] has the right to withdraw from discussions or this offer at any time and this letter should not be considered a firm valuation of the consideration in question.' 57 Needless to say no audited financial statements for the year ending 30 June 2009 were in existence as at the date of HTC Australia's letter of intent. 58 One of the documents assumed to be correct by Mr Hamilton in giving his expert advice was a set of financial statements for Vensys for the year ended 30 June 2007 apparently prepared by Raymond Brooks Chartered Accountant of Werrington County NSW 2747. That set of accounts apparently prepared on or about 27 April 2008 included a compilation report of Mr Brooks which included: 'On the basis of the information provided by the directors of Vensys …, we have compiled … the special purpose financial report of Vensys … for the period ended 30 June 2007, comprising the attached Profit and Loss Statement and Balance Sheet. The specific purpose for which the special purpose financial report has been prepared is set out in Note 1. [Note 1 refers to the financial report as being a "special purpose financial report prepared for use by directors and members of the company" the directors having determined that "the company is not a reporting entity". The Note further indicated that the financial report had been prepared on an accruals basis and was based on historic costs and did not take into account changing money values, or except where specifically stated, current valuations of non-current assets.] … The Directors are solely responsible for the information contained in the special purpose financial report and have determined that the accounting policies used are consistent with the financial reporting requirements of Vensys …'s constitution and appropriate to meet the needs of the Directors and Members of the Company. … No audit or review has been performed and accordingly no assurance is expressed. …' 59 The financial statements so prepared by Mr Brooks showed a profit before income tax of $28,728.75 for the year ended 30 June 2007. The comparable figure for the year ended 30 June 2006 was shown as $8,711.00. 60 The balance sheet as at 30 June 2007 showed current liabilities of $583,327.97 ($120,466.00 as at 30 June 2006). The current liabilities were shown as $322,094.06, being unsecured debts to trade creditors (compared with $18,480.00 for the previous year), $250,001.91 as 'Financial Liabilities' made up of 'Bank loan' of $9,982.37 and 'Loans to shareholders (sic)' $240,019.54, a total of $250,001.91 (compared to $82,129.00 as at 30 June 2006) and $11,232.00 as 'Tax Liabilities' (compared to $19,857.00 as at 30 June 2006). 61 Mr Hamilton's report also assumed the correctness of a 'MYOB' printout of Balance Sheet & Profit & Loss movements at 31 May 2008 'written up by this firm' [Hamiltons' Chartered Accountants] from data supplied by the Company from 31 March 2008, and adjusted to RATA figures at 31 May 2008. The 'Balance Sheet As of May 2008' apparently prepared by Hamiltons on 18 June 2008 showed current liabilities of $833,554.86, which may be compared with $583,327.97 as at 30 June 2007 and $120,466.00 as at 30 June 2006 according to the Financial Statements prepared by Mr Brooks. In the balance sheet as at May 2008 Total Tax Liabilities were shown as $585,223.22 with 'Income Tax Liabilities' of $10,629.15, which may be contrasted with the 'Tax Liabilities' shown in the financial statements as at 30 June 2007, totalling $11,232.00. 62 In the accounts prepared by Hamiltons one of the component figures leading to the statement of 'Total Tax Liabilities' at $585,223.22 was an amount of $708,682.32 shown as 'ATO Running Balance Account'. 63 Mr Hamilton's expert report of 18 June 2008 was recorded on 15 pages. It included: 'EXPERT'S REPORT ON SOLVENCY OF THE COMPANY THE TASK Your letter 6 June 2008 addressed to this firm set out the task expected of me in producing a report to the Court on the solvency of [Vensys] … … Assumptions of Facts: 1. I have assumed that the extrapolation of the aggregate consideration expressed in the offer of HTC [Australia] … arrives at a result set out in my calculations of the timing of the payments of the consideration and amounts enumerated in Tab 15 [the document at Tab 15 included under the heading "Total Aggregate Consideration Subject to conditions being met and estimated date payments" (a) "Up Front" (say August 2008) 600,000.00 (b) 1st Instalment (say August 2009) 1,656,960.00 (c) 2nd Instalment (say August 2010) 2,256,960.00 Total 4,513,920.00] 2. I have assumed that the correct interest rate for arriving at the present day value of the aggregate consideration which is expressed to be paid in instalments, is 18.250% arriving at a present day value of $3,444,435.30. … … Reasons for my opinion Following the opinion of Barwick CJ in Sandell v Porter [(1966) 115 CLR 666 at 670-671] , it is my view that there is no need for me to have regard for the Company's past transactions or financial position other than the present position at the date of this hearing. That is to say, it is the latest financial position which is relevant for the purpose of arriving at an opinion on solvency. … In a Winding Up On the assumption that the customers contracts would either be voided or unlikely to continue as customers should a Liquidator be appointed, the goodwill be lost in the sum of $3,026,893. The realizable value of assets becomes $383,339.25, employees entitlements having a first right of priority in the sum of $180,772.74 and would leave a surplus for other creditors in the sum of $202,566.51 subject to the costs of the administration. Creditors whose debts are in the sum of $805,031.45 will probably receive a dividend to the extent of about 15c in the dollar only on a winding up. There may be voidable Antecedent Transactions such as a recovery of the sum of $100,000 paid to the ATO in May 2008 that would enhance the value of funds available in a winding up. Solvency Based on the present offer and acceptance with HTC [Australia], the up front payment in the sum of $600,000 would be insufficient to discharge immediately the debts of creditors in full, priority or otherwise at the date of the hearing. It would go to the extent of discharging the debt of the applicant in the sum of $595,852.37. The debt of the sole director in the sum of $152,249.33 could be capitalised leaving superannuation, wages and trade creditors of about $240,000 swinging. The only assets remaining in the Company on completion of the HTC [Australia] sale agreement would be the right to pursue HTC for the balance of consideration under the contract as it fell due on the instalment dates for payment and the conditions being met in so far as turnover and EBITDA. The question arises can I say that the Company at this moment can pay its debts as they fall due, or can I place reliance on the conditional contract with HTC [Australia] becoming unconditional after due diligence. I understand that a representative of HTC is to visit Australia on Monday next from India for five (5) working days (source Venkatesh Paditham). It is possible that due diligence and a conditional contract can be completed within four (4) weeks and the $600,000 paid. It is also possible in my view that the first instalment of $1.6(M) which would I assume then be due twelve (12) months later if conditions are met, can be financed within a short period, thus enabling the creditors of $240,000 to also be satisfied in full. That is to say, given four (4) weeks adjournment, it may be possible that the Company will have a conditional contract and evidence of funding of the first instalment and at that stage, based on that evidence, I am able to say that the Company is able to pay its debts as and when they fall due. At the moment, this is foreseeable but is prospective and relies on a number of factors falling into place. … Foreshadowed Solvency I am able to say that in my opinion in the circumstances expressed by me abovementioned, given a short period necessary to achieve the foreshadowed results as enumerated in my alternatives, the Company may be said to be solvent in the sense of being able to pay all of its debts as they fall due. …' 64 In my opinion Mr Hamilton's expert report could not under any circumstances be construed as an expression of opinion that as at 18 June 2008 Vensys was solvent. The report is pregnant with so many ifs and buts and assumptions that it could hardly be described as providing reasonable grounds for Mr Paditham to expect that Vensys was solvent at any material time including 27 June 2008 and 15 October 2008 and would remain solvent even if the payments that were made on those dates were made. Mr Hamilton's expression of opinion, such as it is, is predicated on an assumed adjournment of the winding up proceedings for four weeks from 20 June 2008. No such adjournment was in fact granted although when the matter came before the Court on 27 June 2008 it was adjourned to 1 August 2008. Assuming such an adjournment, Mr Hamilton opined that it was 'possible that the Company will have a conditional contract and evidence of funding of the first instalment' such that 'at that stage based on that evidence, I am able to say that the Company is able to pay its debts as and when they fall due. At the moment [a reference to 18 June 2008], this is foreseeable but is prospective and relies upon a number facts falling into place'. [emphasis added] 65 It may be noted that Mr Hamilton did not anticipate any payments being made to Vensys before August 2008. 66 Before Vensys made the payment of $100,000 to the Commissioner on 16 May 2008 Mr Paditham took some advice from a Mr Condon, an accountant. His professional advice was that Mr Paditham should cause the company to be placed into administration. When it was suggested to Mr Paditham that he did not like Mr Condon's advice and chose not to take it, he replied: 'It was a pure business decision that made me not to accept his advice …' Mr Paditham said that he did not want Vensys 'to go down because there were a number of employees who are dependant on the company, and mostly they were employees sponsored from overseas'. He said that he had to 'look at the best interests of the employees and their families'. Mr Paditham later added 'it was a realisable business value which I did not want to spoil, and jeopardise a number of families at that time'. 67 After Mr Paditham parted company with Mr Condon he took advice from Mr Hamilton on 21 May 2008. On that day Mr Hamilton wrote a letter to Vensys, attention Mr Paditham, providing advice in respect of the winding up application which had apparently been served on the company on 2 May 2008. In the course of his evidence concerning Mr Hamilton's letter of advice of 21 May 2008, which was provided after Mr Paditham consulted him, Mr Paditham gave the following evidence: Counsel: 'Now when you read his expert report, did you understand him to be saying that the company was solvent or insolvent in that report?' Mr Paditham: 'Insolvent …' Counsel: 'He said that company was insolvent?' Mr Paditham: 'Could be solvent if we get a purchaser to - who could pay off the debts, yes.' Counsel: 'So you understood the report said "Currently it's insolvent but it could move to solvency if we can sell off the business"?' Mr Paditham: 'Yes …' Once again, after reading the transcript of his evidence in chief, Mr Paditham sought to 'correct or qualify' this evidence. Mr Paditham indicated that he had misunderstood questions that had been asked of him. However, when asked what his misunderstandings had been, it became apparent that he simply wanted to give different answers to very clear questions that had been subject of very clear answers, a proposition with which his counsel did not disagree. Mr Paditham's attempts to change his evidence reflect adversely on his credibility. 68 A preliminary form of agreement, which would appear to me to have been void for uncertainty (see Whitlock v Brew (1968) 118 CLR 445 at 460-462 and Bishop v Taylor (1968) 118 CLR 518) would appear to have been entered into between Vensys and HTC Australia on 31 July 2008. 69 The agreement contained two recitals which relevantly provided: 'WHEREAS, the respective Boards of Directors of Vensys and HTC [Australia] (collectively referred to as "Constituent Companies") discussed and decided that in the best interests of the operations of Constituent Companies that the assets and the entity of Vensys would be acquired by HTC WHEREAS, the Boards of Directors of the Constituent Companies have approved and adopted this Agreement as a plan of acquisition of Vensys by HTC [Australia] as per the prevailing rules and regulations of NSW, Australia.' 70 The so-called agreement did not include the owners of the issued capital of Vensys as parties, but did provide in clause 3.1: '3.1 At the Effective Date [25 August 2008], all the shares of Vensys shall be transferred to HTC by proper filing of documents with Australian Securities and Investment Commission (sic) (ASIC) and a formal email will be sent to Clients, Vendors and Employees of Vensys.' Under the heading 'ACQUISITION CONSIDERATION AND TERMS' it provided: '1. HTC [Australia] had given a letter of intent vide their letter dated 5th June 2008 to Vensys. In line with LOI and the subsequent preliminary Due diligence carried out by HTC [Australia], it has been agreed that HTC [Australia] would pay initially A$600,000 (Australian Dollars Six hundred thousand only) towards acquisition consideration to Vensys. However, based on the ATO liability shown in the financials of Vensys and as per the request from Vensys, the consideration amount would be paid directly to "Cutler Hughes and Harris Solicitors Trust Account" to clear all the pending liabilities with ATO. This payment would be made by HTC [Australia] on or before the effective date [25 August 2008].' 4.2 The acquisition consideration and other terms would be detailed in a separate Acquisition agreement between Vensys and HTC [Australia]. 4.3 HTC [Australia] will acquire all the assets and the entity of Vensys and HTC shall become the full owner of Vensys with effect from effective date.. 4.4 All the liabilities accrued (incurred directly or indirectly) upto effective date shall be solely to the account of Vensys and their owners and none of these liabilities shall be borne by HTC [Australia] …' 71 Under the heading 'OTHER TERMS' clause 5.5 provided for the reservation to HTC [Australia] of 'the right to terminate this agreement at any point of time before the detailed acquisition agreement is entered into'. 72 The so-called agreement was signed by Mr Paditham for Vensys and by Mr Mudumby Narasimhacharya on behalf of HTC Australia. 73 It seems clear to me that the so-called agreement of 31 July 2008 was no agreement at all. 74 However, it appears that on 29 August 2008 a business sale agreement was entered into between Vensys and HTC Australia. That agreement was prepared for HTC Australia by Thurlow Fisher Lawyers. A draft of the agreement was sent by Mr Clachers of Thurlow Fisher to Mr O'Donnell of Cutler Hughes & Harris, the solicitors for Vensys, by email on 23 August 2008. 75 On 25 August 2008 Mr Chary Mudumby the Vice President of HTC Global Services Inc met with Mr Clachers and provided him with a National Australia Bank Limited bank cheque dated 25 August 2008 made payable to Thurlow Fisher in the sum of $618,661.14 which Mr Clachers described as the deposit amount under the draft business sale agreement. 76 The agreement itself was signed for Vensys by Mr Paditham and for HTC Australia by two directors including Mr Narasimhacharya. The business sale agreement did not contemplate a sale of shares by the owners of Vensys but rather a sale by Vensys of its own business. Under the agreement 'Completion Date' was defined to mean 'the date on which Completion occurs'. The 'Deposit' was defined as $618,661.14. The 'Deposit Holder' was defined as 'the law firm trading under the name 'Cutler Hughes + Harris Business Lawyers' or 'Thomson Playford Cutlers' as the case may be'. 'Purchase Price' was defined as: 'the lesser of: (a) Deposit Amount; and (b) the total amount outstanding at Completion for the Debts' 'Debts' was defined to mean: 'All debts and liabilities owing by the Company [Vensys] as at Completion, including but not limited to the Income Tax Debt, RBA Debt, Superannuation Debt, BAS liability for the Seller for the quarters ended 30 June 2008 and 30 September 2008 an income tax liability for the financial year ended 30 June 2008, amounts owing to unsecured creditors, amounts owing for wages or other employee entitlements, legal costs, the costs of transferring, assigning or novating any contracts' 'Business' was defined to mean: 'the business of the provision of information services carried on by the Seller [Vensys] in Australia' 'Business Assets' was defined to mean: 'the assets used in or forming part of the Business and includes, but is not limited to those listed in Part 1 of Schedule 4' 77 The date for completion was expressed to be 'the later of 4:00pm on 30 September 2008 and 4:00pm on the day which is 5 Business Days after satisfaction or waiver of all of the conditions precedent set out in clause 4.1 (Conditions precedent to Completion), or any other time and date that the Buyer and Seller agree in writing.' There were numerous conditions precedent set out in clause 4.1 of the agreement. 78 The operative provisions of the agreement included: '2 Sale and price 2.1 Sale of Business Assets The Seller must sell the Business Assets to the Buyer and the Buyer must buy them: (a) for the Purchase Price; (b) on the Completion Date; and (c) free of Security Interest or other rights or interests of third parties … 2.3 Going Concern and GST (a) The parties agree that the sale of the Business in this agreement is the supply of a Going Concern. … 3 Deposit 3.1 Payment The Buyer must pay the Deposit to the Deposit Holder to hold on the terms of this clause, within 5 business days after signing and exchanging this agreement. 3.2 Investment The Deposit Holder must invest the Deposit in an interest bearing account in its name. 3.3 Vesting (a) The Buyer is entitled to the Deposit and the Deposit must be returned to the Buyer immediately if this agreement is lawfully terminated before Completion. (b) If the Completion occurs , the Deposit is then to be used as the Purchase Price in accordance with clause 6. The Deposit Holder must fulfil the obligations as per the undertaking for using the Deposit. … 6 Completion … 6.7 Buyer's obligations completion If the Seller performs its obligations in this clause 6, at Completion the Buyer must (a) deliver to the Seller: (1) a written direction to the Deposit Holder to account to the Seller for the Deposit …; and … (b) Upon the Buyer giving the direction referred to in Clause 6.7(a) the Deposit shall become the Purchase Price and payment of the Purchase Price shall be deemed to have been paid in full by the Buyer.' 79 On 28 August 2008 Mr Clachers swore an affidavit in which he deposed: '4. I anticipate exchanging signed contracts with Vensys tomorrow. Once this has occurred, I will transfer money held in my trust account ($578,125.98) to the trust account of Cutler Hughes & Harris in accordance with the sale agreement.' 80 The evidence is unsatisfactory in relation to whether or not an amount was ever paid by way of deposit under the agreement made 29 August 2008 and what the amount of that deposit, if paid, was. What is clear is that on 23 October 2008 the agreement of 29 August 2008 was terminated whereupon Mr Paditham caused Messrs Hamilton and Fiorentino to be appointed as administrators of Vensys. 81 Section 436A(1) of the Act provided: '436A(1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed.' 82 On 24 October 2008 Mr Paditham provided a Report as to Affairs in respect of Vensys in which he disclosed assets with an estimated realisable value in a winding up of $387,474.45 and liabilities of $1,286,520.34 which, apparently due to an oversight, failed to include as one of the liabilities an indebtedness to the New South Wales Office of State Revenue of $71,800 for unpaid payroll tax. 83 Mr Paditham said that he expected that the Business Sale Agreement would settle by 23 October 2008. 84 He conceded that as at 15 October 2008, the date of the third preferential payment to the Commissioner of $16,000, he had an idea as to what sort of debts would still be around on 23 October 2008. Plainly, Vensys' liabilities were not going to be met with the proceeds of a completed sale where the maximum consideration payable was only $618,661.14. 85 During the course of his cross examination Mr Paditham gave the following evidence: Counsel: 'When you add that $71,000 in, even had you, as another debt owed by the company, even had you, as at the day before when you were expecting to get the sale of HTC through, received that $600,000, there wouldn't have been enough money to pay off the debts of the company that were owing as at 23, 24 October, would there?' Paditham: 'Yes …' Judge: 'Were you conscious of that fact as at 24 October?' Paditham: 'Yes …' Counsel: 'Did you understand that fact prior to the payment made, the third payment in October prior to 15 October?' Paditham: 'Yes …' 86 Mr Paditham had been conscious of Vensys' lack of working capital from at least April 2008. In relation to the payment of $25,000 by Vensys to the Commissioner on 27 June 2008 an instruction was given by Vensys to its bankers, Australia and New Zealand Banking Group Limited, not to pay the amount of $25,000 before 26 June 2008. The reason for this instruction was that there was insufficient money in the bank to allow an earlier payment to be made. 87 Mr Paditham readily conceded that he used the Commissioner of Taxation as his bank. 88 It seems clear to me that Mr Paditham made extensive efforts to secure funds for Vensys which could be used to enable it to pay its debts but was unsuccessful in his endeavours. He had a view as to the value of the Vensys business which was plainly unrealistic and disregarded the extensive advice that he had received to place the company into administration. The possibility that the company may be able to meet its debts was totally dependant on a purchaser being found for the business who was willing to pay a purchase price in excess of the amount of the company's debts. 89 It appears to me that, at the relevant payment times, Mr Paditham had nothing more than a hope that Vensys was and would remain solvent even if the relevant payments were made. In my opinion he was less than frank in his testimony. His endeavours in re-examination to avoid the consequences of concessions made by him in cross-examination caused me to have serious doubts as to his overall credibility. I sense that he reviewed the transcript of his cross-examination to see whether the answers he had given were suitable rather than to see whether they were truthful and complete. I am unable to accept his evidence in chief as to his expectations, referred to above. 90 Mr Paditham failed to prove that at the payment times he had reasonable grounds to expect, and did expect, that Vensys was solvent at those times and would remain solvent even if the relevant payments were made. Mr Paditham has failed to make good a defence under s 588FGB(3) of the Act in respect of any of the payments. 91 Accordingly, there should be a judgment for the Commissioner against Mr Paditham in the sum of $109,404.96 together with interest up to judgment. It is not disputed that interest up to judgment on the respective component amounts totalled $4,127.40 in respect of the 153 days from 11 September 2009, when the Commissioner effected his payment to the liquidators, through to 11 February 2010. 92 Since that date it is agreed that interest on the respective amounts has been accruing at a total rate of $26.97 per day. For 56 days this amounts to $1,510.32 up to 8 April 2010. 93 In my opinion judgment should be entered for the Commissioner in the sum of $109,404.96, together with a sum of $5,637.72 in lieu of interest up to judgment plus costs. 94 Mr Paditham is liable to indemnify the Commissioner in respect of the loss or damage resulting from the orders of the Court made on 25 August 2009 pursuant to s 588FF of the Act. Judgment should be entered for the Commissioner of Taxation for a total of $115,042.68 in accordance with s 588FGA(3) of the Act and s 51A of the Federal Court of Australia Act 1976 (Cth). I certify that the preceding ninety-four (94) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Graham.

Commissioner of Taxation v Paditham

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Judgment (8 paragraphs)

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