CORPORATIONS - unfair preferences - creditor paid by third party - whether creditor received "from the company" within s 588FA(1)(b) Corporations Act 2001 (Cth) - case law review at [9]-[39] - Cant v Mad Brothers Earthmoving Pty Ltd - [2021] NSWSC 232 - NSWSC 2020 case summary

Catchwords

(2018) 132 ACSR 1 BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351(2016) 117 ACSR 18 Beveridge v Whitton [2001] NSWCA 6 Burness v Supaproducts Pty Ltd [2009] FCA 893(2009) 74 ACSR 1 CAL No 14 Pty Ltd v Motor Accidents Insurance Board (2009) 239 CLR 390[2009] HCA 47 Cant v Mad Brothers Earthmoving Pty Ltd (in liq) [2020] VSCA 198 Commissioner of Taxation v Kassem (2012) 205 FCR 156[2007] HCA 22 Hosking v Extend N Build Pty Ltd [2018] NSWCA 149(2018) 128 ACSR 555 International Air Transport Association v Ansett Australian Holdings Ltd (2008) 234 CLR 151[2008] HCA 3 Mann v Sangria Pty Ltd [2001] NSWSC 172(2001) 38 ACSR 307 McKern v Minister Administering the Mining Act 1978 (WA) (2010) 28 VR 1[2010] VSCA 140 N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186 R v Commonwealth Conciliation and Arbitration Commission[1998] VSCA 76 Sheldrake v Paltoglou [2006] QCA 52 VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1999] 3 VR 201

Judgment (36 paragraphs)

[1]

Re Discovery Books Pty Ltd (1973) 20 FLR 470 Re Eliana Construction and Developing Group Pty Ltd (No 2) [2019] VSC 546 Re Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292 Re Evolvebuilt Pty Ltd [2017] NSWSC 901 Re Ready Kit Cabinets Pty Ltd (in liq) [2020] FCA 632 Sands & McDougall Wholesale Pty Ltd v Commissioner of Taxation (in liq) [1999] 1 VR 489; [1998] VSCA 76 Sheldrake v Paltoglou [2006] QCA 52 VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1999] 3 VR 201; [1999] VSCA 60 Walsh (as liq of Thompson Land Ltd) v Terranova Pty Ltd (1994) 14 ACSR 432 Texts Cited: Hamilton, "Conflicting Intermediate Appellate Courts Decisions: Voidable Preferences, Third-Party Payments and the Relevance of Double-Entry Book-Keeping" (2020) 20 Insolvency Law Bulletin 207 Keay, "An Analysis of Unfair Preferences under the New Avoidance Regime" (1996) 24 Australian Business Law Review 39 Category: Principal judgment Parties: Richard Albarran and David Ross in their capacity as joint and several liquidators of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) (First Plaintiff) Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) (Second Plaintiff)

[2]

Commissioner of Taxation (Defendant) Representation: Counsel: Mr F Assaf SC / Mr T Rogan (Plaintiffs) Mr S Rosewarne / Mr N Guenther (Defendant)

[3]

Solicitors: Nelson McKinnon Lawyers (Plaintiffs) Craddock Murray Neumann Lawyers (Defendant) File Number(s): 2018/115544

[4]

Judgment

HER HONOUR: This is an application by the liquidators of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liquidation), Richard Albarran and David Ross, to recover some $2 million in voidable transactions under sections 588FA, 588FE and 588FF of the Corporations Act 2001 (Cth). The moneys were paid to the Commissioner of Taxation (ATO) in payment of Western Port Holdings' burgeoning tax debts, whilst the company was the subject of a deed of company arrangement (DOCA).
In total, 37 payments were made over an 18 month period, of which 26 payments were made by the company directly to the ATO (direct payments) and 11 payments were made by a third party to the ATO (third party payments). Two issues are in dispute: 1. whether the third party payments were "receiv[ed] from the company" within the meaning of section 588FA(1)(b) of the Corporations Act, as recently considered in Cant v Mad Brothers Earthmoving Pty Ltd (in liq) [2020] VSCA 198; and 2. whether the payments - both direct and third party payments - were made "by, or under the authority of the administrator of the deed" within the meaning of section 588FE(2B)(d)(i) of the Corporations Act, as recently considered in Commissioner of Taxation v Yeo as Liquidator of Ready Kit Cabinets Pty Ltd (in liq) [2020] FCAFC 199.
The parties made detailed written and oral submissions, including in respect of Cant v Mad Brothers, which was handed down mid-hearing. After the hearing, the liquidators sent an unsolicited aide memoir to my Chambers to which the ATO, understandably, objected and I have not considered. Ready Kit Cabinets was handed down after the hearing and the parties provided further submissions. Whilst the ATO's submissions - to some extent at least - went beyond the leave granted to make supplementary submissions, to which the liquidators understandably objected, the liquidators were able to, and did, respond and thus I have considered these additional submissions. The parties made several submissions which are not reproduced in this judgment but I nonetheless have considered them.
Before turning to the detailed facts, it is timely to review the relevant provisions of the Corporations Act in light of recent appellate authority.

[5]

"RECEIVED FROM" THE COMPANY

Section 588FA(1) of the Corporations Act provides: (emphasis added) 588FA Unfair preferences (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 (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; …
There was generally no dispute in this case that section 588FA(1)(a) was satisfied, including in respect of the payments made by third parties. (The ATO specifically disputed whether a third party payment funded by a loan from a family member, Ian Duthie, comprised a "transaction", which I have considered at [173]).
The problem arose in respect of section 588FA(1)(b), being whether the third party payments resulted in the ATO "receiving from the company" more than the ATO would receive if it had to prove in the winding up. In Cant v Mad Brothers, the Court of Appeal of the Supreme Court of Victoria recently considered what is meant by this phrase and concluded at [120]: … (c) The words 'from the company' in s 588FA(1)(b) have the effect of retaining the requirement under the previous law that the preference be received from the company's own money, meaning money or assets to which the company is entitled. (d) It is necessary, in order for a preference to be 'from the company' that the receipt of it by the creditor has the effect of diminishing the assets of the company available to creditors. (e) On the other hand, a payment by a third party which does not have the effect of diminishing the assets of the company available to creditors is not a payment received 'from the company' and is therefore not an unfair preference.
The liquidators submitted that Cant v Mad Brothers is inconsistent with Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; (2018) 128 ACSR 555, plainly wrong and should not be followed. Also of interest is how Cant v Mad Brothers stands with the decision of the Full Court of the Federal Court in Commissioner of Taxation v Kassem (2012) 205 FCR 156; [2012] FCAFC 124. As recently observed, the differences between these appellate decisions "will create difficulties for any primary court Judge who is in future required to consider whether a payment of a debtor's creditor by a third party constitutes a preference under s 588FA": Hamilton, "Conflicting Intermediate Appellate Courts Decisions: Voidable Preferences, Third-Party Payments and the Relevance of Double-Entry Book-Keeping" (2020) 20 Insolvency Law Bulletin 207 at 211. In light of the liquidators' submission, it is necessary to review the case law which, in any event, illustrates factual scenarios in which an unsecured creditor has been found to have received payment "from the company", and where it has not.

[6]

"BY OR UNDER THE AUTHORITY OF THE ADMINISTRATOR"

Section 588FE(2B)(d)(i) of the Corporations Act provides: (emphasis added) 588FE Voidable transactions (2B) The transaction is voidable if: … (d) the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of: (i) the administrator of the deed …
That is, transactions entered into by a company subject to a DOCA under the authority of the deed administrator are exempt from being voidable transactions. The ATO contends that is what happened here. As the ATO's submissions in respect of the proper construction of section 588FE(2B)(d)(i) were dealt with in Ready Kit Cabinets, it is not necessary to repeat nor reconsider those submissions here. The facts of Ready Kit Cabinets, however, bear repetition as the ATO sought to distinguish the decision on this basis.
The facts are stated in the first instance judgment of Middleton J, Re Ready Kit Cabinets Pty Ltd (in liq) [2020] FCA 632. The ATO had commenced winding up proceedings against a company, which went into voluntary administration and executed a DOCA. The DOCA provided that management and control of the company's day to day business affairs would be returned to the director. The company and its director gave covenants and undertakings, including to comply with the company's tax obligations. The company continued to trade for three years under the DOCA, incurring further liabilities and making further payments to the ATO. The deed administrators did not make the payments, did not specifically instruct anyone to make the payments and did not know about the payments until after they were made: at [45] to [47]. Ultimately, the DOCA was terminated and the company wound up. The liquidators succeeded in its claim to recover the payments as unfair preferences under section 588FA of the Corporations Act.
In construing section 588FE(2B)(d)(i), Middleton J considered that the question was not whether the payments were made "under the DOCA" but whether the payments were made "under the authority of the deed administrators". His Honour explained at [51]: The powers of directors of a company, which are suspended upon appointment of administrators, are revived upon the entering into of a deed of company arrangement: Deputy Commissioner of Taxation v Foodcorp Pty Ltd (1994) 13 ASCR 796, at 798; see also Cargill International s A. v Solid Energy New Zealand Limited (subject to deed of company arrangement) [1016] NZHC 1917 at [43] ('Cargill'). By contrast, the powers and obligations of a deed administrator are provided solely from the terms of the deed of company arrangement: Cargill at [43]. A deed administrator is not an administrator under Pt 5.3A of the Corporations Act. While it is open to the creditors to provide in a deed of company arrangement for the deed administrator to have managerial powers or assume managerial obligations, or to limit or exclude the reinstatement of a director's authority, they are not required to do so: Cargill at [41]-[44].

[7]

FACTS

The liquidators read six affidavits by Mr Albarran and Mr Ross. Mr Ross was cross-examined. The liquidators tendered a large amount of documents. The ATO called no evidence.
Western Port Holdings was the main trading entity within the Westernport Group of Companies trading under the name "Makesafe Traffic Management (Vic)". Western Port Holdings was trustee of DOH Family Trust and provided traffic management services. It was a family business with which Kerry O'Hare and his three sons, David, Andrew (Drew) and Matthew, were engaged.
Mr Ross observed that the company was operated quite informally by members of the O'Hare family: Kerry O'Hare made the major decisions in relation to the company and the conduct of the business; Drew O'Hare was the chief executive officer; David O'Hare was the chief financial officer; and Matthew O'Hare was employed by the business, albeit not involved in management.
It is apparent from the company's balance sheets that the company borrowed money from, and extended loans to, related companies and family members. In particular, David O'Hare had a loan account with the company, as did two O'Hare family companies - SHA (Vic) Pty Ltd, trading as "Simple Hire" (SHA), and Services and Maintenance Group Pty Ltd (SMG) - being companies initially owned by David and Matthew O'Hare, then by Drew's wife, Amber, then by David O'Hare in respect of SMG only.
Western Port Holdings' general ledger for the loan accounts maintained in respect of David O'Hare, SHA and SMG indicate that frequent transactions occurred on these accounts, often several transactions a day. In respect of SHA and SMG, it appears that those companies' expenses, such as fuel and tolls, were paid by Western Port Holdings in the first instance and then reimbursed from time to time. Western Port Holdings appears to have effectively provided an overdraft account for these companies. The third party payments which David O'Hare, SHA and SMG made in due course to the ATO were accounted for in these loan accounts.

[8]

Voluntary administration

In 2013, the ATO served Director Penalty Notices on Kerry O'Hare as director of Western Port Holdings in respect of unpaid superannuation guarantee charges of some $165,000 and unpaid PAYG withholding amounts of some $550,000. According to Mr Ross, Western Port Holdings and related companies "had a history of not paying their statutory liabilities" including payroll tax, superannuation and Pay as you go (PAYG) instalments and withholding, with total statutory obligations owed by the group totalling some $12.5 million. The ATO's collection notes later observed: The client is a high risk to revenue. The client recently liquidated multiple companies with large amounts of unpaid PAYG and SGC obligations. … [T]he client's compliance history across the group is really poor.
By 2013, Western Port Holdings was insolvent. On 13 April 2015, Western Port Holdings went into voluntary administration. Mr Albarran and Mr Ross were appointed administrators. (As matters turned out, the "relation back" period also began.) The company then owed the ATO some $2.3 million and had failed to lodge a large numbers of Business Activity Statements (BAS); the ATO was the largest unsecured creditor of the company by far.
Whilst administrator, Mr Ross traded-on the business. He liaised with Kerry O'Hare and staff in relation to the day to day trading activity of the company. Mr Ross prepared cashflow projections, reviewed labour hire costs, devised strategies to reduce overhead and labour costs, organised and implemented control procedures to monitor ongoing trading operations, reviewed and reconciled wage payments, reviewed and prepared the company's BAS and paid the resulting tax liabilities, reviewed the company's contracts with third parties in respect of current works and projects, reviewed employee files and held staff meeting with employees. The company then employed some 160 staff.

[9]

The DOCA

On 8 May 2015, the administrators provided a report to creditors under section 439A of the Corporations Act, recommending that the company execute a DOCA proposed by Kerry O'Hare. Under the DOCA, control and management of the company would revert to Kerry O'Hare. The deed fund would be $1.09 million, comprising an initial lump sum payment of $250,000 followed by 24 monthly instalments of $35,000, with the last instalment to be paid on 1 May 2017. The administrators estimated that, if Western Port Holdings went into liquidation, unsecured creditors would receive nil return whilst, if the company executed the DOCA, unsecured creditors would receive between 5.13 cents and 8.36 cents in the dollar. Further, if the company went into liquidation, employee entitlements may be partly paid or unpaid whilst, if the company executed the DOCA, employee entitlements would be paid in full.
Mr Ross went to the business premises and addressed employees in relation to a DOCA proposal. The employee creditors agreed to accept the proposed DOCA. On 18 May 2015, the second meeting of creditors was held. Mr Ross chaired the meeting. At the request of the ATO's representative, a poll was taken in respect of the proposal that the company execute the DOCA: 68 creditors, collectively owed $1.855 million, voted in favour of the DOCA; the ATO, owed some $2.6 million, voted against the proposal. As no result was reached, Mr Ross used his casting vote to vote in favour of the resolution, which was carried. As recorded in the minutes, Mr Ross advised the meeting that he voted in favour of the DOCA as it would allow greater funds to become available for distribution to all creditors than if the company were liquidated. In cross examination, Mr Ross said: A significant proportion of those [who voted in favour of the DOCA] were obviously employees as well and under the terms of the deed of company arrangement the company would continue an existence so effectively people would have jobs at the end of the day and I think that's also an important consideration.
On 22 May 2015, the DOCA was executed. Mr Albarran and Mr Ross became deed administrators. Kerry O'Hare signed the DOCA as "the Director", although the DOCA was drafted such as to encompass future directors: clauses 1.2.1 (singular includes plural), 1.2.11 (reference to party includes party's substitute) and 1.3.3 (DOCA also binds the company, its officers and members in accordance with section 444G of the Corporation Act).

[10]

Consideration

Whilst the ATO submitted that the particular provisions of this DOCA are distinguishable from those in Ready Kit Cabinets, the judgments of Middleton J and the Full Court are both admirably short and do not reveal all of the provisions of the DOCA in Ready Kit Cabinets. As the liquidators submitted, this necessarily limits the scope of the ATO's submissions as to the similarity or dissimilarity between the two DOCAs. To the extent that the provisions of the DOCA are described in their Honours' judgments, the provisions appear to have been similar to those at hand.
Turning to the particular provisions of Western Port Holdings' DOCA on which the ATO relies, there is no doubt that the deed administrators had the power - if they chose to exercise it - to permit someone to operate the company's bank accounts. But as will be seen, the evidence establishes that the deed administrators did not in fact exercise that power. The fact that the deed administrators had such a power, albeit unexercised, cannot have the consequence that any payments made by the company during the currency of the DOCA were done under the authority of the deed administrators. Similarly, the fact that clause 4.33 of the DOCA conferred a power on the deed administrators "to do anything else that is necessary or convenient for the purpose of administering this Deed" cannot, without more, convert payments to the ATO as being made under the authority of the deed administrators. Likewise, clause 25 does not have the consequence suggested by the ATO absent evidence that the deed administrators took steps as the company's attorney which resulted in payments being made to the ATO. There does not appear to be any provision in the DOCA which, in isolation from such evidence, would warrant a departure from the conclusions reached in Ready Kit Cabinets.
The ATO's submission that entry into the DOCA had the consequence that all transactions contemplated by the DOCA were done under the authority of the deed administrator is, with respect, an absurd construction of the statute. This would render section 588FE(2B) - which defines certain transactions of company subject to DOCA as voidable - otiose as, on the ATO's argument, everything done under the DOCA would be excluded from consideration as a voidable transaction. Ultimately, I do not consider that Ready Kit Cabinets can be distinguished by reference to the terms of the DOCA.

[11]

Life under the DOCA

David, Matthew and Amber O'Hare were appointed directors of Western Port Holdings shortly after execution of the DOCA. Kerry O'Hare ceased to be a director. (Directorships of Western Port Holdings, SHA and SMG changed with reasonably frequency between members of the O'Hare family.) DOCA contributions began, albeit not in strict alignment with the requirements of the DOCA. After a shaky start, the company began to provide monthly reports to the deed administrators, with the assistance of an accounting firm. The company also commenced lodging outstanding BAS, albeit often belatedly.
The company set up a new MYOB file to store and manage its financial information. Mr Ross did not have access to the MYOB file nor the company's bank accounts, invoices, bills, aged payables, aged debtors, cashflow statements or forecasts. Mr Ross was reliant on information provided by the company's accountant, solicitors or members of the O'Hare family to ascertain the company's financial position. Mr Ross instructed his staff to review the financial reports and information provided and seek clarification.
Mr Ross said his role as deed administrator was to monitor compliance with the DOCA. He disagreed with the proposition that he and his staff had a very "hands on" role beyond monitoring compliance with the DOCA. Mr Ross did not continue to perform the tasks he had undertaken whilst the company was in voluntary administration. Mr Ross was not involved in preparing the company's financial statements or records, reviewing or paying bills or paying wages and superannuation. Mr Ross and his staff were not involved in the day to day running or management of the business. To Mr Ross' observation, Kerry O'Hare was responsible for this, notwithstanding that he had ceased to be a director of the company.
So far as the company's existing and ongoing tax debts were concerned, Mr Ross was not involved in preparing and lodging tax returns or BAS. Mr Ross said he did not direct the company, or any officer of the company, to make payment in any particular amount to the ATO or by any particular date. Mr Ross did have access to the company's ATO portal and was able to view the company's RBA, to see whether the company was lodging its BAS and paying amounts owing. Mr Ross became aware that the company frequently lodged BAS late and payments did not generally correspond with the BAS or the RBA balance. Mr Ross formed the view that the company made payments to the ATO when the company's finances allowed.

[12]

Payments to ATO begin

In August 2015, the first payment in respect of which relief is sought was made. It was a third party payment. On 7 August 2015, David O'Hare paid $81,830 from his bank account to the ATO, which was credited to the company's RBA. At that time, David O'Hare owed some $120,000 to the company. Soon after, a journal entry was made in the company's MYOB accounts, reducing the money which he owed to the company by $81,830. The company's liability to the ATO was reduced by a corresponding amount.
In September 2015, the second payment was made, being a direct payment of $31,344 from the company's bank account to the ATO. The ATO accepts that direct payments fall within section 588FA(1)(b) and are unfair preferences subject, of course, to whether the payments were made under the authority of the deed administrators.
On 7 October 2015, the deed administrators emailed Drew and David O'Hare, noting that some $116,000 remained outstanding for GST and PAYG withholding tax; two BAS's were overdue; and the monthly reports for July, August and September 2015 had yet to be supplied to the deed administrators. The deed administrators requested that the company's statutory liabilities and lodgements be brought up to date as a matter of urgency. (When referring to the company's statutory liabilities, Mr Ross had in mind the moneys owed to the ATO and the State Revenue Office of Victoria (SRO), as the company was also in default of its obligations to pay payroll tax.) The overdue BAS's were promptly lodged. The third 'direct' payment of $29,925 was made to the ATO. In the meantime, further tax liabilities had accrued such that the company owed the ATO some $478,000. Mr Ross was now concerned that the company would not rectify its breaches of the DOCA.

[13]

First default notice

On 12 October 2015, the deed administrators issued a notice of default to the directors of the company. The company was said to be in breach of clauses 7.3.10 and 7.3.11 of the DOCA, being to lodge tax returns and pay instalments and assessments promptly by the due date, and to provide monthly management reports. Mr Ross required the directors to rectify these breaches by 23 October 2015 by bringing the company's statutory liabilities and lodgements up to date and providing monthly management reports for July, August and September 2015 together with lodgement confirmation of BAS for July, August and September 2015 and confirmation of payment of ongoing liabilities to the ATO in respect of GST, PAYG, payroll tax and superannuation. On 16 October 2015, the fourth direct payment was made, being $25,670. The company's compliance with the terms of the DOCA was, by this point, not very encouraging.
On 20 October 2015, Kerry O'Hare called the deed administrators to arrange a meeting to discuss the notice of default. On 22 October 2015, Mr Ross and Kerry O'Hare met. Kerry O'Hare said that the statutory debt was only about $100,000 and he was going to try to sort out a payment plan with the ATO. After the meeting, Mr Ross' staff reviewed the company's RBA and found that the debt owed to the ATO was then some $452,000. This was a recurring theme in what followed: Kerry O'Hare consistently disclaimed the ATO's calculations of the tax owing and suggested that he was negotiating, or had successfully negotiated, a payment plan with the ATO. As often as not, the ATO's collection notes did not accord with Kerry O'Hare's description of the state of negotiations.
On 22 October 2015, the company retained an external accountant who began to provide monthly financial reports and answer the deed administrators' queries. It is apparent that the accountant thereafter endeavoured to reconcile and verify the company's MYOB accounts, which do not appear to have been in a satisfactory state.
On 23 October 2015, four direct payments were made by the company, totalling some $61,000. Kerry O'Hare also emailed Mr Ross' staff setting out a plan to complete all outstanding matters under the DOCA, including paying moneys owing to the ATO by the end of November 2015, "Going forward there should be never any more outstanding amounts owing outside of agreed terms". An extension of time was sought to comply with the notice of default, given slow trading conditions and unexpected expenses. Kerry O'Hare advised, "The above repayment plan has been carefully calculated and we believe that all objectives are achievable. We believe that come December 2015 our accounts will show good monies in the bank". Mr Ross was satisfied that the proposal was satisfactory.

[14]

ATO garnishee notice

The company generated cashflow by entering into factoring arrangements with invoice financiers. On 20 November 2015, the ATO issued a garnishee notice to the company's invoice financier, requiring 50% to be deducted from any payments made to Western Port Holdings, up to $586,858.82. According to the ATO's collection notes, this percentage was selected "as the taxpayer is high risk to revenue and had a really bad compliance history with the ATO". Also on 20 November 2015, the company's accountant provided an updated cashflow to the deed administrators' offices "following the Garnishee Notice and subsequent change of priorities in debt repayments". The company also made a direct payment of $36,650.
On 24 November 2015, the company's accountant asked the ATO to withdraw the garnishee notice and accept a weekly payment of $50,000. The ATO revised the garnishee notice, requiring the company's invoice financier to withhold 17% of payments instead. The deed administrators asked the ATO for a copy of the garnishee order, which was provided. The ATO advised the deed administrators that the company had asked for the order to be varied to "enable them to meet their gross wages", as well as obligations under the DOCA and superannuation.
By late November 2015, Mr Ross' view - based on the RBA and his review of the books and records available to him at the time - was that the company would not be able to rectify the defaults under the DOCA. On 30 November 2015, Mr Ross met with the company's solicitors, who advised that it was essential for the garnishee order to be removed, even if the ATO needed to take security over various properties owned by the O'Hare family. In an email sent by the company's solicitor to Mr Ross after the meeting, the solicitor noted: You have expressed concern about the credibility of my client as a result of past promises which have not been met. You have also expressed concern about a lack of co-operation in providing source documentation that supports the cash flow forecasts provided. I have advised my client that it must be fully co-operative and be able to demonstrate that the cash flow forecast presented can be relied upon. … … The O'Hare family are well aware of the consequences of possible liquidation and have undertaken to me that they will co-operate in every way possible to give you, [the invoice financier] and the ATO confidence that the business has the ability to meet, and will meet, its past and future commitments and liabilities.

[15]

Second default notice

On 1 December 2015, the company failed to make a deed fund contribution. On 2 December 2015, the deed administrators issued a second notice of default by reason of the company's failure to make the contribution. On 3 December 2015, the deed administrators sought further information in respect of the updated cashflow and requested a meeting with the directors. Mr Ross said that, as a result of the company's repeated failures to comply with the DOCA, he had formed the opinion that it was not viable to continue under the DOCA and the company should be wound up.
On 4 December 2015, the deed administrators' office called the ATO and advised that Western Port Holdings had defaulted again on the DOCA and a default notice had been issued. The deed administrators were concerned about the company's viability and wanted to know what the ATO's position would be if the deed administrators decided to terminate the DOCA. Further, the deed administrator wished to take control of the company and try to sell it, in which event, the deed administrators would request the ATO to withdraw the garnishee notice. The ATO advised the deed administrators that it was seriously concerned about the company's ability to satisfy the terms of the DOCA as well as pay ongoing obligations. However, the ATO was not in a position to say whether it supported Mr Ross' decision to terminate the DOCA; the ATO would give the matter serious consideration if a creditors' meeting was called.
On 4 December 2015, the deed administrators met with Kerry, David and Drew O'Hare and their solicitor. Mr Ross advised that the deed administrators proposed to terminate the DOCA. Whilst an initial default notice was issued in September 2015, "It has become subsequently clear that the company had been in breach of the terms of the DOCA for some time prior to issuing the initial default notice". Further, Western Port Holdings and related parties "had a history of not paying their statutory liabilities". Non-payment of statutory debt was described by Mr Ross as a "major default"; the cashflows provided had "holes"; the company and its directors had "had plenty of chances" to rectify the breaches under the DOCA. Further time to rectify the breaches could not be provided. A decision needed to be made in order to advertise the company's business for sale.
Kerry and Drew O'Hare asked whether raising funds within 24 hours to pay outstanding statutory obligations and DOCA contributions would stop the deed administrators placing the company into liquidation. Mr Ross confirmed that the deed administrators would "reconsider their position" should funds be injected into the company to pay outstanding statutory liabilities and DOCA contributions.

[16]

First ATO payment arrangement

On 11 December 2015, David O'Hare withdrew $400,000 from his bank account - being the account into which Mr Duthie had deposited $600,000 - from which a bank cheque was drawn payable to the ATO. The cheque was provided to the ATO and credited to the company's RBA. A general journal entry was made in the company's accounts on 11 December 2015, recording a loan from David O'Hare of $400,000. It is not entirely clear why Mr Duthie's loan resulted in the creation of two loan accounts, but it is tolerably clear, particularly by reason of the document referred to at [118], that it was Mr Duthie who lent $600,000 to the company and there was no loan by David O'Hare of $400,000.
On 11 December 2015, the ATO withdrew the garnishee notice in light of the bank cheque and the company's proposal to pay $60,000 a month until the debt was repaid in full. The company was also required to provide security to cover the liabilities of the company and associated Director Penalty liability. The same day, the deed administrators pressed the ATO for its decision in respect of the proposed payment arrangement and was informed that an 'in principle' agreement had been reached.
On 15 December 2015, the deed administrators sought confirmation from the ATO that a payment arrangement had been entered into and that the company was no longer in default under its statutory obligations. Confirmation was duly provided. After receiving confirmation that the ATO had agreed to a payment arrangement, Mr Ross did not consider the DOCA should be terminated as he believed the company was attempting to rectify the breaches under the DOCA. The deed administrators, however, moved to weekly reporting.
On 22 December 2015, the ATO advised the deed administrators that the company was no longer in default under its statutory obligations and the ATO was obtaining security to cover the liabilities of the company and associated Director Penalty liability. The deed administrators forwarded this letter to the invoice financier, who had been seeking assurance that the company's debts to the ATO and SRO had been satisfied. The deed administrators advised the invoice financier that, as long as the company complied with the payment plans with statutory bodies and with the DOCA, the deed administrators had no further concerns.
The company abided by the payment plan for several months. Four direct payments totalling some $397,000 were made. In January 2016, the deed administrators sought further information in respect of the weekly cashflow reports. In cross-examination, Mr Ross said he was not happy with the cashflows. Mr Ross also sought a copy of the payment plan entered into with the ATO and confirmation that the company had funds to make the next payment. The deed administrators also sought a copy of the payment plan from the ATO directly.

[17]

Refinance

In February 2016, Hermes Capital Australia Pty Ltd approached the deed administrators, seeking approval to refinance the company's invoice financier. Hermes Capital needed the deed administrators to give a release in respect of the company's book debts. The deed administrators sought details of the proposed facility and confirmed that the company was currently in default of the DOCA.
Further third party payments were made on 23 February 2016. Self-evidently, there was a correlation between Western Port Holdings' cashflow problems and third party payments. 1. SMG paid $88,500 to the ATO, which was credited to the company's RBA. SMG's loan account with Western Port Holdings then stood at $69,611.48, that is, the company was in debt to SMG. In the company's MYOB accounts, the payment to the ATO was recorded as a further loan from SMG, increasing the balance of the loan account to $158,111.48. 2. SHA paid $24,500 from its bank account to the ATO, which was credited to the company's RBA. At this time, SHA's loan account with Western Port Holdings stood at $17,704.37, being an amount owed by SHA. In SHA's MYOB accounts, the payment to the ATO was entered as a loan to Western Port Holdings. A corresponding loan from SHA was entered in the company's MYOB accounts, with the result that Western Port Holdings now owed SHA $6,795.63. Whilst, historically, SHA had always owed the company money, thereafter the balance of the loan account was the other way.
In March 2016, the company's accountant asked the ATO to defer payment of the January 2016 BAS, as the company was unable to pay. The invoice financier was said to have been slow to release funds; two weeks were sought to consolidate finances. The ATO advised that, if the company could not make the payment by 6 March 2016, then the ATO may have to contact the deed administrators to advise that the taxpayer had defaulted on their payment arrangement.
On 7 March 2016, the company's accountant provided the deed administrators with the weekly report, advising that there had been a significant injection of funds from the O'Hare family and related parties during the week, given drawdown problems with the invoice financier. On 8 March 2016, the company's solicitor advised the ATO that any recovery action would seriously jeopardise refinance. On 10 March 2016, the outgoing financier sought confirmation from the deed administrators that they approved the refinance and, on 11 March 2016, the deed administrators advised that they had not consented but were liaising with the directors and had requested further information in relation to defaults under the DOCA.

[18]

Third default notice

The deed administrators discovered that Western Port Holdings had lodged the BAS for February 2016 but $243,918 remained outstanding. On 13 April 2016, a third notice of default was issued for breach of clauses 7.3.7 and 7.3.10 of the DOCA. In respect of clause 7.3.7 ("cause the Company to pay its debts as and when they fall due"), the deed administrators had been contacted by an insurer's solicitors, who were instructed to commence proceedings against the company in respect of outstanding insurance premiums of some $164,000; Westpac had advised that the company was in arrears in respect of various finance agreements. In respect of clause 7.3.10, payment of the February BAS remained outstanding. The breach was to be remedied by 20 April 2016.
The company did not respond to the third notice of default but, on 20 April 2016, Hermes Capital made a third party payment to the ATO of $243,918 in respect of the February BAS. Of the $2.5 million invoice finance facility, available credit of $875,063.95 then remained.
On 3 May 2016, the deed administrators sought confirmation from the company's solicitor that the matters referred to in the third notice of default had been attended to and that the statutory liabilities of the company which had fallen due in April 2016 had been or would be paid. The company's solicitor advised that the company was liaising with the ATO and would be satisfying the statutory obligations from cashflow. There were said to have been delays due to refinancing several properties, and it was said that the ATO had allowed the company until 16 May 2016 to attend to outstanding payments and provide security. I have found no record of such an agreement in the ATO's collection notes.

[19]

Fourth default notice

On 9 May 2016, the deed administrators followed up the company's monthly accounts for March 2016. On 10 May 2016, the deed administrators issued a fourth notice of default. In addition to the matters in the third notice of default, the deed administrators noted that the March BAS had not been paid, with $267,424 outstanding. The company had also failed to make the fourth payment instalment due on 16 April 2016 and to supply monthly management account reports for March 2016. The breach was to be remedied by 17 May 2016.
On 17 May 2016, the ATO called the deed administrators and was informed of the fourth default notice, which expired that day. The deed administrators advised that they would contact the ATO before placing the company in liquidation. The ATO officer advised that the company had failed to comply with the terms of the 'in principle' agreement; "We have given them ample time to provide information regarding the security and to make all lodgements and payments up to date but they failed to do so". On 17 May 2016, the company's solicitor advised of its progress in paying the insurers, Westpac and the ATO, noting that it was in the progress of negotiating the payment of arrears of the April BAS by refinancing several properties. Again, I can find no record of these negotiations in the ATO collection notes.
On 19 May 2016, the ATO met with Kerry and David O'Hare, who proposed to enter into a payment plan to pay 30% of payments received each week and to pay at least $350,000 from the proceeds of a refinance. The ATO required the O'Hares to get back to them with a minimum amount that they would be paying each week. On 20 May 2016, the deed administrators advised Kerry, David and Drew O'Hare that the company's failure to pay statutory liabilities was a default under the DOCA and they were required to bring the company's liabilities up to date as a matter of urgency.
On 23 May 2016, the company made a direct payment of $37,023 to the ATO, leaving an amount owing of some $680,000. On 24 May 2016, the company's solicitor informed the deed administrators of the meeting with the ATO, where it was said that the ATO had agreed to receive weekly drawdown payments and was supportive of the company's offer to pay 30% of weekly drawdown until payments were up to date. The deed administrators were asked to liaise with the ATO to confirm that the company was not defaulting under its current payment arrangements. Ten further direct payments were made from the company's bank account from May to September 2016, totalling some $300,000.

[20]

Fifth default notice

On 10 June 2016, the deed administrators issued a fifth notice of default to the company. The company had failed to pay a number of creditors. In addition, the company owed $717,302.90 to the ATO and the April 2016 BAS had not been lodged nor paid. The company had failed to meet its obligations under the payment arrangement with the ATO by failing to make two instalments; the deed administrators were yet to receive confirmation that payroll tax and superannuation was up to date. These breaches were to be remedied by 20 June 2016.
On 20 June 2016, the company's solicitor addressed the fifth notice of default, advising that, in respect of the ATO and the SRO, a payment plan had been agreed upon, and attached an email from the ATO. The ATO's email is not in evidence but, on 21 June 2016, the deed administrators sought further information from the company in respect of the payment proposal as the ATO's email did not provide sufficient detail in relation to the debt which the payment proposal would cover.

[21]

Second and third ATO payment arrangements

On 27 June 2016, the ATO consulted with Kerry O'Hare and agreed to accept a monthly payment of $120,000. The total amount of debts then stood at $1.5 million, including Directors Penalty Notice debt of $670,000. On 28 June 2016, the ATO sent a letter to the company confirming the agreed payment schedule. On 4 July 2016, the deed administrators requested a copy of the payment arrangement from the company's solicitors, together with confirmation that other matters in the fifth notice of default had been attended to. The company advised it would provide the formal payment arrangement when it was to hand.
In fact, it appears that the company was endeavouring to negotiate a revised payment arrangement with the ATO. The ATO's collection note records that, on 8 July 2016, Kerry O'Hare proposed that 30% of all invoices paid each week would be sufficient to cover the company's ongoing obligations. The company offered to pay $5,000 a week, paid monthly, to pay off existing debts. The company was said to be in the process of obtaining substantial finance. The ATO decided to accept the reviewed payment arrangement for six months to allow the company to refinance and to enable the ATO to monitor the company's compliance with its ongoing tax obligations. On 9 July 2016, the ATO issued a letter confirming the third payment plan.

[22]

A meeting of creditors to terminate the DOCA

On 19 July 2016, the deed administrators advised the company's solicitor that, if the directors did not provide the information sought by close of business, the deed administrators would send a report to creditors to convene a meeting. On 20 July 2016, the deed administrators wrote further noting that, in light of a revised proof of debt submitted by the ATO which increased the liability of the company by some $425,000, the DOCA would provide less than full payment to employee creditors and a nil return to unsecured creditors. The director was invited to put forward a proposal to vary the terms of the DOCA, failing which the deed administrators would be recommending that the DOCA be terminated. Mr Ross says he formed the view that the DOCA should be terminated due to the company's continued defaults in failing to meet its ATO liabilities and in failing to provide the deed administrators with financial management reports. Mr Ross was of the view that the company would not be able to rectify these defaults.
On 22 July 2016, the deed administrators issued a report to creditors, convening a meeting on 3 August 2016 to determine whether creditors wished to terminate the DOCA and wind up the company. The deed administrators expressed the opinion that the company was presently not in a financial position to satisfy the terms of the DOCA whilst meeting the ongoing requirements under payment plans with the ATO and creditors. The DOCA was unlikely to result in the previously anticipated return to unsecured creditors. The deed administrators recommended that the DOCA be terminated and the company be placed in liquidation.
The day before the meeting of creditors, Kerry O'Hare met with the ATO. According to the ATO's collection notes, "Kerry stated that the Administrator is pushing him to place the company into liquidation for their own benefits but the client doesn't want to place the company into liquidation". Mr O'Hare promised to lodge and pay all ongoing obligations by the due dates and to pay $20,000 a month for the next three months, to allow them to refinance. The ATO agreed to vote against the proposed termination of the DOCA at the creditors' meeting on the basis of this agreement.
On 3 August 2016, the meeting of creditors took place. Mr Ross outlined the history of defaults in respect of the DOCA and that, based on the current position, there may be no return to unsecured creditors of the company. Mr Ross advised that the DOCA contributions were up to date and generally paid on time and that the secured creditor, Hermes Capital, was not in favour of the company being placed into liquidation. After extensive discussion, the majority of creditors (both in value and number) - including the ATO - voted against terminating the DOCA.

[23]

Fourth ATO payment arrangement

On 14 November 2016, the deed administrators followed up their request for information from the company, which provided an update on its progress with paying payroll tax and superannuation but was silent in respect of its arrangements with the ATO. On 29 November 2016, the company made its last direct payment of $20,000 to the ATO, leaving an outstanding balance of $1,734,449.
On 2 December 2016, the ATO noted that the payment arrangements were in default. On 15 December 2016, Kerry O'Hare met with the ATO and requested additional time to pay outstanding tax liabilities. On 16 December 2016, the ATO agreed to a fourth payment plan, with instalments of $20,000 for three months, and instalments of $40,000 for a further three months after which time the arrangement would be reviewed. The tax debt then stood at some $1.8 million. Mr Ross says the deed administrators had no involvement in this payment arrangement nor knew of it at the time.
The first payment under the third ATO payment arrangement was made on 5 January 2017 by SHA, which transferred a third party payment of $20,000 from its bank account to the ATO. The company's MYOB accounts recorded a corresponding increase in its loan from SHA. David O'Hare was then the sole director of SHA.
On 12 January 2017 and 16 January 2017, the deed administrators sought information and confirmation from the company in respect of its increasing defaults in its obligations to pay the ATO, to provide accounts and attend to its statutory liabilities. The company's solicitors advised that the RBA was greatly inflated, the company was not defaulting under its current payment plan and other matters were generally 'in hand'.
The final third party payments were made on 31 January 2017, being a payment by SHA of $10,000 and a payment by SMG of $10,000. Accounting entries were made in the MYOB accounts of SHA and SMG recording loans to the company. The loan was not recorded in the company's MYOB records. As at 31 January 2017, the balance of those loan accounts was $160,170 for SHA and $77,560 for SMG, that is, Western Port Holdings owed both companies money.

[24]

Sixth default notice

On 7 March 2017, the deed administrators issued a final notice of default to the company for failure to pay its debts as and when they fell due, failing to pay its statutory liabilities by the due date (the balance of the company's RBA account then stood at some $1.9 million), failing to lodge the December 2016 and January 2017 BAS statements and provide confirmation that payroll tax and superannuation had been paid; failing to provide financial statements for the year ended 30 June 2016 or monthly management accounts from October 2016 on. The breaches were to be rectified by 10 March 2017. A response was provided on 10 March 2017, which it is not necessary to repeat. Further information was sought. Reminders were sent.
On 28 March 2017, the deed administrators wrote again, expressing serious concerns in relation to the company's financial position and ability to continue to fulfill the terms of the DOCA. Unless the breaches were remedied by 30 March 2017, the deed administrators proposed to notify creditors under section 445HA of the Corporations Act of a material contravention of the DOCA.
On 24 April 2017, the deed administrators participated in a telephone conference with Kerry and David O'Hare. It appears to have been agreed that the deed administrators would take possession of the company's premises and prepare to sell the business. On 5 May 2017, the deed administrators notified creditors that the deed administrators had taken possession of the business.

[25]

Termination of DOCA

On 9 May 2017, the deed administrators provided a report to creditors, convening a meeting on 24 May 2017 to determine whether creditors wished to terminate the DOCA and wind up the company. On 23 May 2017, the Supreme Court of Victoria appointed the deed administrators as receivers and managers of the business and assets of the DOH Family Trust. On 24 May 2017, the creditors resolved to terminate the DOCA and appointed the deed administrators as liquidators. The relation-back period for the purposes of section 588FE(2B) of the Corporations Act was, thus, from 13 April 2015 to 24 May 2017. The company then had 78 creditors whose claims totalled some $10.1 million. The ATO's proof of debt was for some $6.9 million, comprising $2.3 million in respect of unpaid superannuation and $4.6 million in respect of the company's RBA deficit debt.
The liquidators then sought documents from the ATO, the company's accountant and the O'Hares. The liquidators obtained backup MYOB files for the company and, it appears, gradually reconstructed the payments in respect of which relief is now sought. In December 2017, the liquidators sent a letter of demand to the ATO. These proceedings were commenced in April 2018.

[26]

Present position

There are insufficient funds remaining in the company to pay a dividend to any class of creditor. If the liquidators are successful in these proceedings, Mr Ross estimates that there will be a return of between 61 and 100 cents in the dollar for priority creditors in relation to superannuation, up to 100 cents in the dollar for other priority creditors in respect of unpaid wages, annual leave and redundancy, and up to 4 cents in the dollar to ordinary unsecured creditors.
As matters presently stand, the ATO has received approximately 31 cents in the dollar in relation to the RBA deficit debt compared with the 4 cents in the dollar which the ATO will receive if left to prove in the winding up. As a consequence of receiving payments during the DOCA period, the ATO has received more than it will if it has to prove for the debt in the liquidation of the company.

[27]

APPLICATION OF READY KIT CABINETS

Unlike Ready Kit Cabinets, the ATO submitted that the deed administrators took an active role in issuing directions to the company to make payment of the outstanding tax liabilities. In Ready Kit Cabinets, the deed administrators did not know about the payments to the ATO until after the payments had been made. Here, the deed administrators sought details and were informed about the company's compliance with tax liabilities, regularly followed up the company and the ATO in respect of unpaid amounts, sought confirmation that the tax liabilities were being paid, and issued five notices of default requiring the company to rectify its breaches of the DOCA and make payment of its outstanding tax liabilities. The deed administrators actively pressed the company and director to pay the company's outstanding liabilities and threatened termination of the DOCA should it fail to do so.
By reason of these matters, the ATO submitted that each of the payments were made under the authority of the deed administrators. By operation of section 444G of the Corporations Act, as noted in clause 1.3 of the DOCA, the DOCA bound the company, the director and the deed administrators. The express terms of the DOCA authorised and required the payments to be made, the deed administrators were parties to and bound by the terms of the DOCA, and the evidence was said to demonstrate that the deed administrators gave directions requiring that the payments be made. By continuing to trade, the company would incur further tax liabilities; a condition of control of the company being handed back to the director was that these tax liabilities would be paid in full as and when the liabilities fell due.
The deed administrators were said to have been supportive of the company arranging for further capital to be injected into the company so that it could make payments required under the DOCA and agreed not to terminate the DOCA on that basis. The invoice finance facility with Hermes Capital could not have been entered into had the deed administrators not provided their consent for security to be granted to Hermes Capital. During the DOCA period, Mr Ross and his staff regularly contacted the ATO to request confirmation as to whether the company had entered into payment plans and queried whether the company was complying with those payment plans.
The liquidators submitted that, consistently with Ready Kit Cabinets, control of the company was returned to the directors pursuant to the DOCA. The payments were made by the directors exercising that control. The payments were therefore made under the authority of the directors. There is no occasion in s 588FE(2B) to look behind the authority of the directors to ask how that authority came about. This case was not distinguishable. It was submitted that the state of the deed administrator's knowledge of the payments was a matter of no consequence in the reasoning of Middleton J or on appeal. The relevant inquiry was the source of authority for the relevant payment.

[28]

Conclusion

The evidence does not support the ATO's submission that the deed administrators issued directions to the company to pay tax debts. Indeed, the evidence is not dissimilar to that in Ready Kit Cabinets: Mr Ross did not make the payments, he did not specifically instruct anyone to make the payments, and he did not know about the payments until after they had been made. Mr Ross was aware that there were ongoing discussions between the company and the ATO about payment arrangements, but was not a party to those discussions. Mr Ross' description of his role and involvement in the payments (see [76] to [77]) was accurate.
It will be apparent from the correspondence and meetings (described from [80] on) that the lines of communication: between the company and the ATO; between the company and the deed administrators; and, between the deed administrators and the ATO were, on occasion, composite but, as often as not, were separate lines of communication. The deed administrators were generally not copied into communications between the company and the ATO; there was usually a delay between the company reaching an agreement with the ATO and the deed administrators being informed of this matter, or being provided with a confirmatory letter from the ATO.
There is no doubt that Mr Ross and his staff pressed the company to meet its statutory liabilities. The ATO was the biggest unsecured creditor of the company. Compliance with the company's obligation to meet its statutory obligations was a core obligation of the Director under the DOCA. It is apparent that Mr Ross saw the company's inability to meet this obligation as a key indicia as to whether, and when, the DOCA should be terminated. But that does not mean that the payments ultimately made by the company to the ATO were made under Mr Ross' authority as opposed to the Director's authority, to whom control and management of the company had be re-vested by the DOCA.
The facts do not warrant any departure from the conclusions reached in Ready Kit Cabinets. So far as can be seen, the deed administrators did not make the payments to the ATO nor direct the company to make the payments. Rather, the payments were made under the authority of the "Director", to whom management of the company had been returned on execution of the DOCA.

[29]

APPLICATION OF CANT v MAD BROTHERS

The ATO submitted that the third party payments were not unfair preferences as the ATO received nothing from the company: Evolvebuilt at [66], Cant v Mad Brothers; Ramsay v National Australia Bank Ltd [1989] VR 59. Other creditors may in fact receive a greater dividend as the result of the transaction because one of the creditors, who otherwise would have proved in the liquidation, has been paid out: Keay, "An Analysis of Unfair Preferences under the New Avoidance Regime" (1996) 24 Australian Business Law Review 39 at 43. This could be contrasted with cases such as Walsh (as liq of Thompson Land Ltd) v Terranova Pty Ltd (1994) 14 ACSR 432 and Analogy Pty Ltd (Receiver and Manager Appointed) (in liq) v Bell Basics Industries Ltd (Full Court of the Supreme Court of Western Australia, Malcolm CJ, Kennedy and Anderson JJ, 23 August 1995, unreported, BC9502636).
The ATO submitted that the third party payments were not unfair preferences as the ATO's receipt of the payments did not diminish the assets of the company otherwise available to creditors. In some cases, the payments may have resulted in the substitution of one creditor (the ATO) for another (the third party). Unfortunately, the ATO did not descend into the detail of each particular transaction and indicate why this was so.
In respect of Hermes Capital, the ATO also submitted that, although Western Port Holdings gave security over all present and after-acquired property of the company, the company likely had no assets. It was said that there was no evidence that the security was of any value. Rather, it was submitted: The evidence does not explain what impact on the net assets of the company either the entries into the Hermes facility or the making of payments pursuant to it occasioned. That lack of evidence means that it has not been shown that even the payments made pursuant to the Hermes facility resulted in any reduction in the assets of the company such that there was a preference within the meaning of the authorities. If there is any doubt about the evidence, your Honour, and what occurred, you should find [the liquidators have not discharged their] onus.
The liquidators submitted that it is only necessary to establish that the third party payment was authorised by the debtor such that the payment in issue could be said to have been made "by or on behalf of" the debtor company: Burness per Gordon J at [45]; Kassem at [42]. Brereton J's differing approach in Evolvebuilt was not endorsed in Hosking at [31]. Here, the third party payments were clearly loans by third parties to the company and are not distinguishable from Kassem. Further, each of the third party payments would give rise to a restitutionary claim of the type contemplated by Gordon J in Burness. The Court of Appeal in Hosking was "inclined" to the view that the creation of such a claim in the debtor's favour would be sufficient to constitute a payment made by a third party a payment "received from" the company for the purposes of s 588FA(1)(b): Hosking at [111]. The liquidators submitted that the Court should follow the Court of Appeal's inclination. However, as already analysed at [9]-[39], I am bound to follow Cant v Mad Brothers.

[30]

Conclusion

There were 11 third party payments in this case, being: 1. one payment by David O'Hare, the circumstances of which are described at [78]; 2. one payment funded by a loan from Mr Duthie to the company, the circumstances of which are described at [99] to [102], [105] and [118]; 3. three payments by SHA, the circumstances of which are described at [111], [144] and [146]; 4. three payments by SMG, the circumstances of which are described at [111], [139] and [146]; and 5. three payments by Hermes Capital, the circumstances of which are described at [115] and [120].
As already noted, none of the O'Hares gave evidence in this case as to the precise circumstances which gave rise to each payment, although one would not necessarily expect that they would be willing to assist either the liquidators or the ATO in this case. Nonetheless, in addition to Mr Ross' evidence of his dealings with the O'Hare family, there is a substantial body of records of contemporaneous communications and accounting records. Together, this evidence may enable inferences to be drawn as to the circumstances surrounding the payments to the ATO.

[31]

Payment by David O'Hare

At the time when David O'Hare paid $81,830 from his bank account to the ATO, he owed Western Port Holdings some $120,000. On making the payment to the ATO, David O'Hare loan account with the company was reduced by $81,830. The company could no longer demand payment of $81,830 from David O'Hare; that money or asset was no longer available for distribution to creditors. Thus, the payment was made out of moneys or assets to which the company was entitled: Cant v Mad Brothers at [109]. The fact that Western Port Holdings' tax debt also reduced, and thus the net assets were unchanged, is a distraction: Cant v Mad Brothers at [112].
Although it is not strictly necessary to consider this, there was no written direction by the company to David O'Hare to make the payment to the ATO, no contemporaneous email nor any evidence from David O'Hare. I infer, however, that such a direction was given having regard to the fact that David O'Hare was then a director of Western Port Holdings. He was also the company's chief financial officer. David O'Hare would have been aware of the company's financial circumstances, including the moneys which he owed to the company. Further, soon after the transaction, an accounting entry was made by the company recording a "payment to ATO from D O'Hare …". The reduced balance of David O'Hare's loan account was thereafter reported in the company's balance sheet. Where a company directs a third party to pay moneys to which the company is entitled, "Such moneys are plainly received from the company because they are moneys to which the company is entitled and the benefit of which is received by the creditor from the company, by its direction": Cant v Mad Brothers at [115]. I find that is what occurred in respect of this payment. Consequently, the transaction resulted in the ATO "receiving [funds] from the company", within the meaning of section 588FA(1)(b) of the Corporations Act.

[32]

Mr Duthie's loan

As to Mr Duthie's loan of $600,000 to Western Port Holdings, of which $400,000 was on-paid to the ATO, the loan was obtained in circumstances where the deed administrators wished to terminate the DOCA and place the company into liquidation. Kerry and Drew O'Hare wished to prevent this occurring by raising funds within 24 hours to pay down tax debt and an outstanding DOCA contribution. The loan was obtained from Drew O'Hare's father in law. Although the moneys were paid into the bank account of David O'Hare and on-paid to the ATO, the company's records recognise that the moneys were lent by Mr Duthie to Western Port Holdings.
As was explained in Re Emanuel, the "transaction" referred to in section 588FA(1) is the totality of dealings through which a company effects a change in its rights, liabilities or property, irrespective of whether one or more of the dealings in the sequence involves a third party and not the company. "The transaction … is the totality of the dealings initiated by the debtor [company] so as to achieve the intended purpose of extinguishing the debt": at 299-300. I am satisfied that Mr Duthie's loan is a "transaction" within the meaning of section 588FA(1). The company was in urgent need of finance. Mr Duthie agreed to provide finance. It was a simple loan transaction between the company and Mr Duthie. The fact that the funds were remitted, in the first instance, by Mr Duthie to David O'Hare, who drew on the funds to obtain a bank cheque which was delivered to the ATO, does not detract from the nature of the transaction. The loan was procured in haste, generated by Mr Ross' determination to terminate the DOCA and wind up the company if funding was not obtained within 24 hours. The true nature of the transaction was later documented in conventional terms. Thus, I find that section 588FA(1)(a) of the Corporations Act is satisfied.
As to whether the transaction resulted in the ATO receiving from the company more than it would in a winding up, the case is no different from that which would apply if Western Port Holdings had borrowed the money on overdraft from its bank and paid the ATO with those funds: Kassem at [62]. Thus, the funds were received by the ATO from the company within the meaning of section 588FA(1)(b) of the Corporations Act.

[33]

Payments by SHA and SMG

In respect of the payments made by SHA and SMG, on occasion these payments had the consequence of reducing the moneys which these companies owed Western Port Holdings. Insofar as these payments resulted in a reduction of the moneys owed by SHA and SMG to Western Port Holdings, then the principles in [171] apply equally here. On occasion, these payments were loans to Western Port Holdings. To the extent that the payments to the ATO had the consequence that SHA and SMG extended a loan to Western Port Holdings, then the principles described at [174] apply. Either way, the transactions resulted in the ATO "receiving [funds] from the company", within the meaning of section 588FA(1)(b) of the Corporations Act.
As mentioned at [146], the final third party payments made by SHA and SMG were recorded as loans in the accounting records of SHA and SMG but not in the accounting records of Western Port Holdings. The fact that the third party payments were not recorded in the company's MYOB accounts is consistent with these loans being made by SHA and SMG as 'volunteers', giving rise to a restitutionary claim only. However, given that the third party payments were recorded in the MYOB accounts of SHA and SMG as loans to Western Port Holdings, together with the history of loans made by SHA and SMG to the company, the fact that the company went into liquidation shortly thereafter, and the fact that the company's accounting records were less than perfect, is also consistent with a finding that Western Port Holdings called upon these companies to provide further loans to meet ATO debt, and those loans were provided but not recorded in the midst of the company's financial turmoil. I consider that the latter scenario is more likely, and I so find.
Although it is not strictly necessary to consider, I do not doubt that the payments were made by SHA and SMG at the direction of Western Port Holdings, given the relationship between the companies, the directors and shareholders of those companies, and inter-connected nature of their businesses having regard, in particular, to the day-to-day transactions on the inter-company loan accounts: see [53].

[34]

Payments by Hermes Capital

In respect of the payments made by Hermes Capital to the ATO, it is true that in March 2016 - when the Hermes Capital facility was drawn down - the net assets of the company were some -$362,000. However, the asset of prime importance to an invoice financier is outstanding invoices rendered by the company. It is against that asset that moneys are drawn down, as was apparent from a "Factoring Record" maintained by Hermes Capital. On each occasion when Hermes Capital made payments to the ATO, outstanding invoices exceeded $2 million. The payments made by Hermes Capital to the ATO were secured over those invoices.
Where a loan is drawn down in order to pay a company's debts, and where the loan is secured, "the transaction will result in a diminution of the assets available to unsecured creditors": Cant v Mad Brothers at [112]. The funds paid by Hermes Capital to the ATO were secured over the company's book debts. The third party payments by Hermes Capital resulted in a net diminution of these assets which were available to unsecured creditors. The funds were thus received by the ATO from the company within the meaning of section 588FA(1)(b) of the Corporations Act: see also Kassem at [62].

[35]

ORDERS

For the above reasons I make the following orders: 1. Order pursuant to section 588FF(1)(a) of the Corporations Act 2001 (Cth) that the defendant pay to the second plaintiff the sum of $2,056,974.33 together with interest pursuant to section 100 of the Civil Procedure Act 2005 (NSW). 2. Order the defendant to pay the plaintiffs' costs of the proceedings.

[36]

Amendments 16 March 2021 - Cover sheet - legislation reordered [99], [105], [168(b)] - Correction to "Duthie" Cross referencing amended 23 July 2021 - [40(a)] - "between the contract" amended to "between the company" 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: 23 July 2021

CORPORATIONS - unfair preferences - creditor paid by third party - whether creditor received "from the company" within s 588FA(1)(b) Corporations Act 2001 (Cth) - case law review at [9]-[39] - Cant v Mad Brothers Earthmoving Pty Ltd

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