Cussen and Anor v Commissioner of Taxation

1 On 13 April 2000 the Second Plaintiff ("Akai") was wound up by the Court and the First Plaintiff ("the Liquidator") was appointed as its liquidator. By an Amended Originating Process the Liquidator seeks a declaration that eight payments of sales tax made by Akai to the Defendant ("ATO") between 5 October 1999 and 21 March 2000, totalling $8,185,525.12, were unfair preferences within the meaning of s.588FA of the Corporations Act 2001 (Cth), insolvent transactions within the meaning of s.588FC and voidable transactions within the meaning of s.588FE. Orders for repayment with interest are sought accordingly. 2 The ATO does not dispute that Akai was insolvent at the time of the payments and that the payments were unfair preferences within the meaning of s.588FA. The sole issue between the parties is whether the ATO has established a defence under s.588FG(2)(b), i.e., whether the ATO has discharged the onus of proving that at the time the payments were made it had no reasonable grounds for suspecting that Akai was insolvent or would become insolvent by making the payments, and that a reasonable person in the ATO's circumstances would have had no reasonable grounds for so suspecting. The Liquidator concedes that the other elements of the defence required by s.588FG(2)(a) and (c) are satisfied. History prior to relation back period

3 Akai was incorporated in 1977. It was a wholly owned subsidiary of a Japanese company, Akai Electric Co Ltd, and conducted a very substantial business in Australia and New Zealand as a distributor of electrical goods. 4 There is no evidence to suggest that Akai did not comply with its obligations to pay sales tax in a timely manner from the commencement of its business in Australia in or about 1977 until August 1998. As far as the evidence reveals, the first indication which the ATO received that Akai was in any difficulty in paying its sales tax was a facsimile sent on 11 August 1998 to Mr K. Ho of the Hurstville office of the ATO by Mr R. Scarpin, Financial Controller of Akai. The facsimile requested an extension of time from 21 August to 4 September to pay the sales tax for sales made in July 1998, and an extension of time from 21 September to 9 October to pay the sales tax for sales made in August. 5 The facsimile continued: "We make this request on the basis that there are insufficient funds available to discharge the sales tax debt. These requests are short-term and due to cash flow timing. I have attached our Weekly cash flow plan for August 1998 to November 1998 as supporting financial information.

Akai Pty Limited has been a large Sales Tax payer for many years and has demonstrated an excellent payment record. Given this record, and the short-term of our requests, we ask that no penalty tax accrue on these extended payments." 6 On 17 August 1998 Mr Ho wrote to Mr Scarpin approving the requested extensions and noting that penalty tax for late payment would be imposed. 7 On 4 September 1998, the agreed first extension date, Akai paid sales tax of $1,646,645.96 in respect of sales tax for the month of July, together with penalty interest of $7,917.40. On 9 October 1998, the agreed second extension date, Akai paid sales tax of $1,589,462.42 in respect of sales tax for the month of August, together with penalty tax of $9,993.75. 8 By facsimile sent to Mr Ho on 1 December 1998, Mr Scarpin sought an extension of time to pay the November 1998 sales tax, due 21 December, on 8 January 1999 and the December sales tax, due on 21 January 1999, on 12 February 1999. The fax continued: "Due to November and December being seasonally high sales months, the sales tax payments are also exceptionally large. Our cash flow timing means that there are insufficient funds available to discharge the sales tax debt on their due dates. I have attached our monthly cash flow plan for December 1998 to March 1999 as supporting financial information.

Akai Pty Limited has been a large Sales Tax payer for many years and has demonstrated an excellent payment record. Given this record, and the short-term of our requests, we ask that no penalty tax accrue on these extended payments." 9 On 4 December 1998, Mr Ho wrote to Mr Scarpin approving the requested extensions and noting that penalty tax for late payment would be required. 10 The November 1998 sales tax, due pursuant to the extension on 8 January 1999, was in fact paid on 11 January 1999 in the sum of $3,239,293.64, together with penalty tax of $20,367.60. The December sales tax, due pursuant to the extension on 12 February, was in fact paid on 15 February 1999, in the sum of $1,646,390.76, together with penalty tax of $12,787.70. 11 On 15 March 1999, Mr Scarpin telephoned Mr Ho and on 16 March sent a facsimile confirming the conversation in the following terms: "As per our telephone conversation of yesterday, we are requesting an extended date for settlement of sales tax due between the months of March and June 1999.

We are currently in the process of restructuring the business and are experiencing cash flow difficulties in the short term. As explained earlier we have contracted for the sale of our existing premises with settlement expected 30/6/99, this being an integral part of our restructuring process.

We know that we have sought your assistance in the past and trust that you will consider this request having taken into account our excellent payment record.

I understand that you will arrange for a representative of the ATO to ring me and discuss this matter further." 12 On 18 March, Mr Ho's superior, Mr N. Harmanis, telephoned Mr Scarpin. A file note of Mr Harmanis records that Mr Scarpin repeated the substance of what he had said in his facsimile to Mr Ho on 16 March. Mr Scarpin then said that Akai would lodge its sales tax return for March and June 1999 by the due date and sought to remit the payments as and when it was able to do so. Mr Harmanis advised that he could not grant a blanket extension of time and that late payments would attract penalties. Mr Scarpin said that he was aware of the late penalties and would keep Mr Harmanis advised about the company's sales tax returns. 13 On 23 March and 22 April, Mr Scarpin sent to Mr Harmanis Akai's sales tax returns for February and March 1999 but did not attach cheques in payment of the sales tax due. 14 On 4 May 1999, Mr Harmanis spoke to his Team Leader in the ATO, Mr P. Kalina, regarding Akai's outstanding sales tax payments. Mr Kalina advised that the ATO would consider issuing a statutory demand under s.459E Corporations Law if no payments were received and no formal arrangement between the company and the ATO was made. On 6 May, Mr Harmanis rang Mr Scarpin who told him that Akai's cash flow position had not changed. Mr Harmanis said that the ATO would "need an arrangement in place and current remittances being made, if possible" . He said that if no arrangement was made the ATO would consider issuing a statutory demand. As a result of this conversation, a meeting was arrangement between the company's representatives and the ATO's representatives to discuss the matter further. 15 The meeting was held on 13 May 1999. Present on behalf of Akai were Mr R. Nuebel, Director of Finance and Administration, and Mr T. Crowe, a Sales Tax Consultant; present on behalf of the ATO were Messrs Kalina and Harmanis. The substance of what was discussed at the meeting is sufficiently recorded in a letter which Mr Nuebel sent to Mr Harmanis later that day, in the following terms: "We would like to thank Paul Kalina and yourself for taking the time to see us today, and we greatly appreciate your understanding and patience in this matter.

As agreed, we are setting out the circumstances giving rise to our temporary difficulty in meeting our sales tax commitments.

1. Over the last six months, we have experienced difficulties in securing production and delivery of product in accordance with our business plans due to problems encountered by one of our major suppliers overseas. This has meant that our normal annual achievement has been reduced significantly, impacting on our business performance and liquidity. These problems have been identified and rectified and we are budgeting for increased sales leading up to the year ending March 2000.

2. We are also in the process of restructuring the business, which involves the sale of our existing premises at Homebush for A$6.5million to be settled on 30th June 1999. (See extract from the Heads of Agreement attached). We are relocating our office and spare parts warehouse to leased premises at Rydalmere. Our major warehouse operation will be out sourced to a third party provider. The premises at Homebush is unencumbered.

It is confirmed that our outstanding sales tax liability will be cleared on 30th June 1999 upon receipt of settlement of the proceeds from the sale of the building." The Heads of Agreement enclosed with the letter evidenced the sale of the company's premises at Homebush in the terms described in the letter. The letter and the Heads of Agreement were sent by Akai in prompt compliance with the request made by the ATO's representatives at the conclusion of the meeting for written confirmation of what had been discussed, as appears from a contemporaneous file note of Mr Harmanis. 16 As at 13 May, Akai's unpaid sales tax, including penalties, was $2,706,899.81. 17 In early June 1999, Akai's sales tax file was transferred from the Hurstville office of the ATO to the Sydney office under the day-to-day management of Ms E. Thomas, but still under the overall supervision of Mr Kalina. 18 On 18 June 1999, Mr Nuebel wrote to Mr Kalina in the following terms: "I just had a telephone conversation with Mr Nick Harmanis regarding the outstanding sales tax owed by Akai Pty Ltd.

Our plan to have the final settlement on our Homebush building on 30th June has been postponed for one month to the end of July. The reason for this is that according to the attached certificate of practical completion, the final settlement will occur 9 weeks after the certificate was issued. At the time we had our previous conversation with you, it was not foreseeable that this would have a delayed settlement impact.

We appreciate the support we have received over the last few months from the ATO and we suggest to you the following settlement of the outstanding sales tax payment.

$2million on 30th June 1999 $1million on 21st July 1999 Balance on the 30th July 1999.

The June sales tax payment which is due on 21st July 1999 would be settled on 10th August.

We would appreciate it if you provide this flexibility for the repayment of our outstanding sales tax and we thank you for your assistance and understanding in this matter." 19 On 21 June, Ms Thomas prepared a submission to Mr Kalina in respect of the extension request. She noted that the balance of sales tax presently outstanding was $3,272,503.75, that payment of penalty tax of $2,442.35 had been made in respect of March sales tax, and that a further $79,681.40 penalty tax was payable. Ms Thomas concluded: "Although no financial details were given, payment in full will be achieved within 6 wks, the period requested to pay the arrears is relatively short considering the total amount outstanding, therefore I seek acceptance of proposal."

Akai's request for an extension was approved by letter dated 28 June 1999. 20 On 1 July Akai paid to the ATO the sum of $2m, which had been due on 30 June in accordance with the agreed extension. On 21 July Akai paid the sum of $1m, in accordance with the agreed extension. 21 On 26 July, day-to-day management of Akai's sales tax file was transferred from the Sydney office to Mr J. Blumner of the Parramatta office, under the supervision of Ms C. Pepin. 22 On 28 July, Mr J. Jeffery, Accounting Manager of Akai, wrote to the ATO noting that $2,643,679.16 remained outstanding in respect of sales tax for June, May and the balance of April. The letter proposed to pay this amount by instalments of $700,000 on 30 July, $500,000 on 2 August, and $1,443,679.16 on 10 August. The letter continued: "The reason for the delay in payment is due to a delay in the settlement of the sale of our building at Homebush. If there are any further delays to the settlement of the property we will advise." 23 Mr P. Baumgarten, an officer in the Sydney office temporarily dealing with the matter, gave interim approval to the request, subject to subsequent authorisation by the Parramatta office of the ATO. 24 On 29 July, Akai paid $700,000 to the ATO, a day prior to the extended date for that payment. The second instalment of $500,000 was not paid on the due date, 2 August. On 4 August Mr Baumgarten had a telephone conversation with Mr Jeffery in which Mr Jeffery said that the payment of $500,000 which was to have been made by electronic funds transmission could not be made on the due date because an internal modem in Akai's office broke down and a replacement also failed to work. Mr Jeffery said that a cheque for $500,00 was being sent by courier that day. The cheque was in fact received by the ATO on that day and was cleared without difficulty. 25 On 9 August, Mr Blumner of the ATO Parramatta office rang Mr Jeffery about the outstanding sales tax instalments. Mr Jeffery said that the settlement of the sale of Akai's Homebush premises had occurred but that the company's bank had wanted settlement of its account out of the proceeds. Mr Jeffery said that Akai had a cash flow problem, explained the reasons and sought an extension of time for payments. Mr Blumner asked him to send an amended proposal for payment of the balance of outstanding sales tax. Later that day, Mr Jeffery sent Mr Blumner a facsimile in the following terms: "Following on from our telephone conversation this morning I wish to clarify our cash position. Akai has received the proceeds for our premises at 2 Australia Ave Homebush. Prior to this letter we believed that this receipt would have enabled us to pay our outstanding debt of $1,443,679.16.

Akai's cashflow problem arises during the month of July 1999. During this month our major customers held off purchasing any product in light of the drop in sales tax rate from 32% to 22% on the 29th July 1999. Akai had budgeted for sales during the calendar month of July to be around $4.3 million. Actual sales achieved were approximately $1.5 million. The cash impact of this drop in sales is that there is not as much cash to collect in August 99 as what was expected.

Below is a proposed 'final' repayment schedule for our account $500,000.00 on 13th August 1999 $350,000.00 on 23rd August 1999 (Being sales tax for the month of July 1999) $943,679.16 on 3rd September 1999" 26 On receipt of the facsimile, Mr Blumner rang Mr Jeffery and said that his team leader (Ms Pepin) was away so that he could not approve the amended payment offer. He asked Mr Jeffery to send the first instalment of $500,000 on 13 August in any event. 27 On 12 August, Mr Blumner wrote a submission to Ms Pepin recounting his discussion with Mr Jeffery, setting out Akai's proposed amendment to the instalment payments and recommending that the ATO accept the proposal for payment of $500,000 by 13 August and the balance of all remaining sales tax, $1,047,978.41 by 3 September. 28 On 13 August, Akai paid the first instalment of $500,000, according to the proposed amended schedule for payments. On 16 August, Ms Pepin approved Mr Blumner's recommendation for the amended payment schedule. On 19 August, Mr Blumner wrote to Akai allowing an extension to 3 September 1999 for payment of the sum of $1,070,600.16. 29 On 20 August, Akai paid to the ATO the sum of $350,000, being the instalment which it had proposed in its letter of 9 September to pay on 23 August. On 3 September, Akai paid to the ATO the sum of $986,047.48. 30 The Liquidator accepts that on 3 September 1999, Akai had paid all arrears of sales tax: see the Liquidator's chronology, paragraph 43.10: Plaintiff's Outline of Submissions, paragraph 21, Ex. P1 p.114. 31 On 8 September, Mr Jeffery rang Mr Blumner and told him that Akai was going to have trouble paying the August sales tax (due on 21 September). Mr Jeffery requested him to put his request and explanation in writing. On 10 September Mr Jeffery sent by facsimile a letter in the following terms: "The sales tax that is due for the period ending 31 August 1999 is $1,258,577.46.

I am writing to advise that Akai Pty Limited will not be able to pay this debt on the 21 September 1999 when payment falls due.

Akai is not able to pay in time because our receipts collectable in the month of September 1999 are unseasonably low. Low collections have resulted because customer demand during the month of July 1999 was low. Customer demand was low in light of the 29 July 1999 reduction in the wholesale sales tax rate from 32% to 22%. Akai collects money in 60 day time cycles, which is the industry norm. Hence, we are collecting July 99 sales in September 99.

I wish to propose the following repayment schedule:

We pay 10% on the 21 September 99 which is $125,857.74. We pay the balance of $1,132,719.72 with interest added on the 4 October 99.

I hope that the above schedule is to your satisfaction in light of our circumstances." 32 On 13 September, Mr Blumner prepared a submission for Ms Pepin as follows: "This company has been affected by government policy and may need time to adjust to the new conditions. They underestimated the effects that the change in the sales tax rate would have on their cash flow. In their previous arrangement they paid their STAX arrears on time. This offer is for payment in full within 14 days, which is more than reasonable.

I can not approve this offer as my delegation limit is $500,000 over 24 months. However, my manager is able to approve the offer as her limit is $2.5 million.

$125,857.74 by 21/9/99; $1,132,719.72 plus approximately $5,621.15 GIC." 33 On 15 September, Mr Blumner wrote to Akai agreeing to the payment arrangements proposed in Mr Jeffery's facsimile of 10 September. On 16 September, Akai paid to the ATO $125,857.74, being the instalment due on 21 September.

34 The relation back period commenced on 22 September 1999 and the Liquidator claims repayment as unfair preferences of all payments made thereafter by Akai to the ATO. 35 The next agreed instalment of sales tax, together with late payment penalties, was to be paid on 4 October, a total of $1,137,812.92. That instalment was paid in full on 5 October. 36 On 21 October, Akai paid in full on the due date sales tax for the month of September. No extension of time for this payment had been sought. 37 By facsimile letter dated 8 November to Mr Blumner, Mr Jeffery advised that sales tax for October would be $1,311,431.86. He proposed the following repayment schedule:

The ATO approved the repayment proposal on 10 November. 38 On 18 November, Akai paid to the ATO the first instalment under the agreed schedule, $655,715.93, three days before the due date. On 10 December, the agreed date for the second instalment, Akai paid the remaining 50% of sales tax. 39 On 21 December, Akai paid in full on the due date the sales tax for November, amounting to $1,696,893.31. No extension of time for this payment had been sought. 40 On 21 January 2000, Akai paid in full on the due date sales tax for December 1999, amounting to $1,332,526.44. No extension of time for this payment had been sought. 41 On 22 February, Akai paid in full the sales tax for January 2000, amounting to $874,931.44. The payment was one day late; no extension of time had been sought. 42 On 21 March, Akai paid in full on the due date sales tax for February 2000, amounting to $753,324.65. No extension of time for the payment had been sought. 43 On 22 March, an application for the winding-up of Akai was filed and a provisional liquidator was appointed.

44 Mr Aldridge SC, who appears with Mr Rodionoff for the ATO, says that the case is straightforward and turns essentially on its facts. His submissions may be summarised as follows. 45 Some of the ATO officers who dealt with the matter gave evidence and were cross examined. They were Mr Kalina, Ms Pepin, Mr Baumgarten and Ms Thomas. Mr Blumner had died before the proceedings came to trial. An affidavit of Mr Harmanis was read but he was not cross examined. All of the witnesses who gave evidence said that they did not know or suspect that Akai was insolvent at the time that the ATO received each of the payments of sales tax from August 1998 onwards. Their evidence should be accepted. In so far as s.588FG(2)(b)(i) requires the ATO to establish that, subjectively, it had no reasonable grounds for suspecting that Akai was insolvent at the time that it received the eight preference payments, that requirement has been satisfied. 46 The objective test required by s.588FG(2)(b)(ii) is also satisfied: on the facts of the case, no reasonable person in the position of the ATO would have had grounds for suspecting at the time of receipt of the preferential payments that Akai was insolvent or would become insolvent by making the payments. In support of this submission, Mr Aldridge relies upon the following facts and circumstances. 47 First, for about twenty years prior to August 1998, Akai had conducted a very substantial business, as its sales tax payments indicated, without having had any difficulty in paying sales tax, as far as is revealed by the ATO's records tendered in evidence. 48 Second, at all times from 1998 onwards, Akai acted as one would expect of a responsible, solvent debtor which was experiencing a temporary cash flow problem. Its senior officers contacted that ATO before any default in payment of sales tax had occurred, explained that the inability to pay was temporary, and sought extensions of time, which were granted. 49 Third, Akai generally complied punctually with its obligations to make payments in accordance with the agreed extensions of time. In some cases, it actually paid early. 50 Fourth, on 3 September 1999, shortly before the commencement of the relation back period, all arrears of Akai's sales tax had been paid in full. A relatively small amount of penalty tax was outstanding. This would have strongly suggested that Akai's explanation that it had been suffering only a temporary cash flow problem was correct and that the problem had been rectified. 51 Fifth, the payments made during the relation back period were made punctually, either in accordance with agreed extensions of time for payment, or on the due dates, no extension having been sought.

52 Mr Cotman SC, who appears with Mr Lucarelli for the Liquidator, does not submit that the ATO, through the officers concerned in the matter, had an actual suspicion of insolvency at the time that the impugned payments were received; he submits that the ATO fails in its defence only under s.588FG(2)(b)(ii): T124.43-126.58. 53 Mr Cotman's first submission is that the evidence of greatest assistance in assessing whether a person in the ATO's position would have suspected insolvency is that of Mr Kalina: Liquidator's Outline of Submissions, paragraphs 6ff. Mr Kalina attended the meeting on 13 May 1999 with Mr Nuebel and Mr Crowe. From the information he gathered at that meeting and from Mr Nuebel's letter of the same date, Mr Kalina was aware that:

• Akai's liquidity problem was due to poor sales performance over the previous six months: T18.12, 18.30-.38;

• Akai thought that it could trade out of its difficulties and could pay the outstanding sales tax from the proceeds of sale of its Homebush premises: T24.25;

• Akai had told the ATO that the Homebush premises were unencumbered: T21.36-.55. 54 Mr Cotman relies on the following evidence of Mr Kalina and Ms Thomas:

• Mr Kalina said that if it had come to his attention that the sales tax return for April 1999 indicated that Akai's sales figures had halved, that would have been "a fairly alarming piece of information" : T22.34-23.7;

• if he had been told at about the time of the 13 May 1999 meeting with the Akai representatives that Akai's bank wanted a significant part of the proceeds of sale of the Homebush premises in reduction of Akai's debt, that would have been a matter of significant concern to him: T25.50-.57, T30.6-.48, T32.40-.45;

• the suggestion made to Mr Blumner in Mr Jeffery's letter of 9 August 1999 (which Mr Kalina did not recall seeing) that a drop of sales in July would impact on cash collections in August did not make much sense in his experience: T32.6-.51;

• if he had seen Mr Blumner's file note of 9 August 1999 recording that the Homebush premises had been sold but that the bank wanted settlement of its account out of the proceeds, he would have been extremely concerned: T30.28;

• Ms Thomas gave similar evidence to Mr Kalina about the halving of April sales figures, concern about the company's bank wanting settlement of its account out of the proceeds of sale of the Homebush premises, and the suggestion that a drop in sales in July had a cash flow consequence in August. 55 Mr Cotman submits that the evidence of Mr Kalina, corroborated by Ms Thomas, establishes that had a reasonable person been aware of what Mr Blumner knew on 9 August 1999, such person would undoubtedly have had a suspicion that Akai was insolvent: Outline of Submissions paragraph 13. I am unable to accept this submission: it focuses on certain pieces of information but takes no account of the whole of the picture as presented to the ATO at the relevant times. 56 As at 13 May, the ATO's experience with Akai would have given the impression of a substantial, responsible trading company, with a long history of paying its sales tax without delay or difficulty, now dealing openly with the ATO in endeavouring to overcome a temporary cash flow difficulty. Akai had approached the ATO in August 1998, before any default in payment of sales tax had occurred. It had given an explanation for its difficulty and had proposed a timetable for deferred payments. It had complied with that timetable in September and October. The timetable for deferred payments in January and February 1999 was also complied with, although a few days late. 57 A timetable for further deferred payments in respect of the sales tax due from March to June had not been proposed by Akai in March 1999, although in its letter of 16 March Akai had advised that it was restructuring its business and intended to realize cash by selling its premises. However, as soon as the ATO, through Mr Harmanis, made an enquiry, Akai's Director of Finance and a sales tax consultant attended a meeting with Messrs Kalina and Harmanis to discuss the matter. At this meeting the Akai representatives gave an explanation of the problems which had caused what they said was a temporary cash flow difficulty. They told the ATO representatives that the problems had been identified and rectified and that Akai was budgeting for increased sales. 58 It is not to the point that Mr Kalina would have had "significant concerns" had he been told at or about the time of the meeting in May 1999 that Akai's bank wanted to receive a substantial part of the proceeds of sale of the company's premises in reduction of its debt. The ATO was not told of the bank's position until 9 August. However, by that time the availability of cash from the sale of the Homebush premises would not have seemed critical. According to Akai's letter of 9 August, settlement of the sale of the Homebush premises had only recently occurred, but Akai had nevertheless been able to honour its arrangements to pay $2 million on 1 July, $1 million on 21 July, $700,000 on 29 July, and $500,000 on 4 August. It would have seemed, therefore that the sale of the Homebush premises was not Akai's only available source of funds to pay its debts and that it had other resources available which enabled it to comply with its commitments to make payments to the ATO exceeding $4 million within a space of about five weeks. 59 Further, the drop in Akai's sales figures for April 1999 - which Mr Kalina agreed would have been "a fairly alarming piece of information" had it come to his attention - must have lost its significance by August and certainly by 5 October, when the first of the preferential payments was made. Sales tax payable for each of February and March 1999 had been in the order of $1.3 million; sales tax payable for April had been $602,000, which indicated a major downturn in sales in comparison with the previous two months. Yet the sales tax payable for May was about $1.2 million and the sales tax for June was about $1.18 million, suggesting that the sales for April had been a marked anomaly. Sales tax for July was $266,000 but Akai explained in its letter of 9 August that that drop in sales was also an anomaly, being the result of major customers holding off purchasing product in the light of the recently announced cut in the sales tax rate from 32% to 22%. Later figures seemed to prove this explanation correct. Sales tax was about $1.26 million for August, $1.08 million for September, $1.31 million for October, $1.7 million for November, $1.33 million for December, $875,000 for January 2000 (explicable by the Christmas holidays), and $753,000 for February (possibly explicable for the same reason). 60 Mr Cotman lays heavy emphasis on the evidence of Mr Kalina and Ms Thomas that Akai's explanation that the drop in sales for July 1999 impacted on cash collections in August did not make sense to them. I do not think that that evidence is of much assistance. Mr Kalina and Ms Thomas did not know of Akai's internal arrangements for collecting sales receipts, or whether Akai may have put in place special arrangements for collecting or factoring receipts to assist it in overcoming its cash flow problems in mid-1999. Standing on its own and in the light of Mr Kalina's experience of how other businesses collected sales receipts, Akai's explanation about the effect of July sales on cash collections in August might have seemed odd. But the ATO's previous experience with Akai gave no basis for a belief that Akai's earlier explanations of its difficulties had been untruthful. A reasonable person in the position of the ATO was entitled to take the attitude that "the proof of the pudding was in the eating": if Akai duly and punctually complied with the arrangements for deferred payments, then there would be good reason for thinking that the explanation which it had offered was correct; on the other hand, if Akai significantly failed to honour the arrangements, there would be good reason for suspecting not only its solvency but the truthfulness of the explanation which it had given to the ATO in making those arrangements. In my view, it was just as reasonable to take this attitude to the explanation as to cash collections given in Akai's letter of 10 September as it was to the explanation given in the letter of 9 August. 61 As at 5 October 1999, the date of the first of the impugned payments, the whole of the picture which presented itself to the ATO might be summarised thus:

• Akai, a long established, substantial trading company with no previous history of sales tax default, had approached the ATO in August 1998, saying that it had a temporary liquidity difficulty and sought extensions of time to make sales tax payments not yet due;

• between August 1998 and October 1999 Akai had substantially complied with its obligations to make payments in accordance with agreed timetables;

• the poor sales figures for April and July 1999 seemed to be anomalous - May, June, August and September sales tax figures seemed generally in line with sales tax figures for February and March 1999;

• Akai's expectation that it would be able to trade out of its liquidity difficulties by a combination of selling its premises and more profitable trading seemed to be justified: by 3 September 1999 all arrears of sales tax had been paid in full;

• on 8 September 1999 Akai had explained that the sales tax rate reduction in July was still having an effect on its receipts collections and sought and obtained an extension for payment of the August sales tax. The first agreed instalment of the August sales tax was in fact paid five days earlier than the stipulated date, suggesting that Akai had been truthful and realistic in seeking the extension of time for payment and that its expectations were being fulfilled;

• the payment shown in the ATO's records as having been made on 5 October was due on the previous day. In the light of the previous history, the delay was insignificant. For all one knows, the payment may have been made on 4 October but processed only on the following day. 62 Mr Cotman's second submission is that the ATO, when assessing applications for extension of time to pay tax, operates on the premise that the taxpayer has no other means at its disposal to pay the debt on time and in full. "Thus unlike a commercial or trade creditor, who may legitimately assume persistent late payment by a debtor is simply the debtor taking liberties with the formal terms of payment, without any connotation of insolvency, the [ATO] starts from the premise that the debtor is 'technically insolvent' - that is, unable to pay all its debts as and when they fall due" : Outline of Submissions, paragraph 14. It follows, says Mr Cotman, that a reasonable person in the ATO's position on 9 August 1999, "being a person satisfied that Akai had since March 1999 no other means of paying the tax in full and reacting to the known facts in the manner Mr Kalina (and Ms Thomas) would have, must have had a suspicion of insolvency …" . 63 I am unable to accept this submission. If it were correct, it is difficult to see how the ATO could ever succeed in a defence under s.588FG(2). Beginning with the presumption that the taxpayer was insolvent, the ATO would have to conduct an investigation falling not far short of an audit in order to prove the taxpayer's solvency before being able to extend time for payment of a tax debt and to accept payment in accordance with the agreed extension. Such an investigation could often prove difficult, expensive, time consuming and, not infrequently, inconclusive. 64 Mr Cotman's submission is that, because of its internal policy on collection of tax debts, the ATO is in a special position which sets it apart from other creditors for the purpose of a defence under s.588FG(2)(b)(ii). I do not think that this submission is supported by the authorities. As has been emphasised by Austin J in Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564, at 572 (paras.33-35), the objective test imposed by s.588FG(2)(b)(ii) does not require an examination whether the particular creditor, acting reasonably, would have had reasonable grounds for suspecting insolvency, with the consequence that if the creditor happens to be a bank (or a tax collecting authority) one asks whether a reasonable bank (or a reasonable tax collecting authority) would reasonably have had such a suspicion. Rather, whether or not the creditor would have reasonably had a suspicion is determined according to the presumed perception of "the ordinary person on the Bondi bus" : per Young J in Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543, at 545-6. That pithy phrase simply denotes that an objective test is to be applied and the standard of measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the "average business person", but certainly not the skills and experience of an expert financial analyst or someone with legal training or any other kind of tertiary education: ibid. 65 I do not read the ATO's internal procedures manual as evidencing a policy which assumes that a taxpayer is insolvent before the ATO may grant an extension of time to make tax payments. However, even if that were the ATO's policy, it would be a policy peculiar to the ATO: it is not a policy or assumption which would be adopted as a matter of course by the "average business person on the Bondi bus" who is asked to grant a debtor time to pay. The average business person makes no automatic assumption that a request for time to pay is, without more and of itself, a manifestation of insolvency rather than of temporary illiquidity. Far more must be known before one can reasonably have "a positive feeling of actual apprehension" , amounting to a suspicion, that a person is insolvent: per Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, at 303. As Santow J said in Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477, at 483 (para.43): "The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion [of insolvency]."

Further, as Priestley JA said in Sparad (No 100) Ltd v J.B. Harkness (unrep. NSWCA 14 February 1997, at p.20), undue weight cannot be placed on dilatory payment because "debts are not always paid on time by solvent traders" ; see also per Young J in Wily v Lo Presti (No 2) (1997) 16 ACLC 85, at 92. 66 Mr Cotman's next submission is that circumstances occurring after 9 August 1999 would have raised a reasonable suspicion that Akai was insolvent. In support of this submission, Mr Cotman makes the following points:

• Akai's income tax return for the financial year ended 30 March 1998 was lodged on 20 August 1999. Officers in the sales tax collection team could have obtained access to the information in the income tax return, had they wished. The income tax return disclosed that as at 30 March 1998 Akai had posted a net loss of $3.187 million, had accumulated losses of $10.041 million, and had a deficiency of $11.4 million in working capital;

• the "phenomenon" of Akai being up to date with its sales tax payments on 3 September was "fleeting". Shortly afterwards it again requested an extension of time for payment of the August sales tax and gave an explanation about a sixty day collection cycle which was inconsistent with the suggestion, made on 9 August, that it had a less than thirty day collection cycle: Outline, paragraph 21;

• Akai sought another extension of time for payment on 8 November for the October sales tax. No explanation for its inability to pay on time was given;

• the sales tax payments which were made on time during the relation back period were consistent with the ATO "assuming the role of Paul and some other creditor assuming the [ATO's] erstwhile role of Peter" : Outline, paragraph 29. 67 I am unable to accept Mr Cotman's submission that a reasonable person in the ATO's position would have had a suspicion of insolvency in October 1999 because of the contents of Akai's tax return for the financial year ended 30 March 1998. 68 First, none of the relevant ATO officers dealing with Akai's sales tax payments actually became aware of the contents of Akai's March 1998 tax return. Tax returns were received and dealt with by an entirely separate department within the ATO. There is no evidence that officers in the tax return department were under a duty to pass information routinely to officers in the sales tax collection team or vice versa. The ATO officers in the sales tax collection team were entitled to obtain access to Akai's tax return but failure to make that investigation does not, in my opinion, put the officers on constructive notice of what they would have discovered had they made enquiry. So to hold would be to construe s.588FG(2)(b)(ii) as operating on the assumption that "the average reasonable business person" routinely makes his or her own enquiries into a debtor's financial position from all available sources before agreeing to extend time for the payment of a debt, and agrees to the extension only if the enquiry demonstrates solvency. In my view, such an assumption is unrealistic and unreasonable. 69 Second, even if the ATO officers had called up the March 1998 tax return on or about 5 October 1999, it would have told them little of value about Akai's financial position some eighteen months after the balance date. On its own, it would not have shown that Akai was insolvent in March 1998, let alone as at 5 October 1999. As Mason P has pointed out in Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office (2002) 42 ACSR 501, at 513, "it is clear law that the statutory test of solvency looks at matters on a 'cash flow' basis rather than a simple 'balance sheet' basis" . Accordingly, against the picture presented by the tax return as at 30 March 1998, the ATO officers would have had to contrast Akai's subsequent ability to bring its sales tax arrears up to date by 4 September 1999 and its successful record of meeting its obligations under the various agreements for deferred payment, including its ability to pay some $4 million in sales tax in a five week period in July and August 1999. The March 1998 tax return would have told the ATO nothing about how Akai had managed to bring sales tax arrears up to date and what its cash flow position was as at 5 October 1999. 70 Next, Mr Cotman submits (T133.25) that the ATO's manual entitled "Policy for the Collection of Taxation Debts" lays down procedures for the collection of debts including sales tax debts. Those procedures require the ATO to make certain enquiries and to be satisfied about certain matters in considering whether or not to grant an extension of time to a taxpayer to pay a tax debt: see Ex.P1, Vol.2, Tab.3, Section 10. Mr Cotman says that where the ATO has granted an extension of time to a taxpayer to pay a debt and the payment is later impugned as a preference, in order to establish a defence under s.588FG(2)(b)(ii) the ATO must show either that it has followed all of the procedures in the manual governing the granting of time to make payments, and that such enquiries as were made produced no evidence of the taxpayer's insolvency, or else the ATO must show that, if the procedures were not followed, enquiries in accordance with the procedures in the manual would nevertheless have produced no evidence of insolvency. I am unable to accept this submission. 71 First, the procedures manual clearly states that the manual "does not have the force of law. Each decision made by the [ATO] is made on the merits of the individual case, having regard to the legislation, this Manual and any relevant ruling" : see manual p.16. In other words, the procedures set out in the manual are no more than guidelines, to be followed or adapted as the circumstances of each particular case require. 72 Second, the fact that the ATO has developed its own internal procedures for the collection of tax debts does not put the ATO into a special category of creditors for the purpose of a defence under s.588FG(2)(b)(ii) for the reasons which I have given in response to Mr Cotman's previous submission: see paragraphs 62 to 64. The ATO's internal procedures are peculiar to itself and are not to be taken as defining the characteristics of the "average reasonable business person" so that whether or not the ATO's officers followed the procedures of the manual in any particular case is irrelevant to determining whether the objective test in s.588FG(2)(b)(ii) has been satisfied. 73 I am unable to accept Mr Cotman's final submission that the payments made on and after 5 October 1999 should have done nothing to remove any earlier suspicion of insolvency and that the payments were consistent with Akai paying the ATO at the expense of other creditors. 74 In my view, the pattern of payments of payments made by Akai on and from 5 October must be seen in the context of Akai's previous history of payments substantially in accordance with agreed schedules and in the context of the arrears of sales tax having been brought up to date by 3 September. So viewed, the pattern of payments made on and from 5 October would have suggested to an "average business person" that Akai had indeed been suffering from a temporary liquidity problem and not from insolvency. Of the eight impugned payments, five were made on the due dates (in one case a day later) without any request for an extension of time; of the other three payments, two were paid on the agreed extension date, and the third a day late. In my opinion, as and when each of these payments was received, a reasonable person in the circumstances of the ATO, knowing the prior history of Akai's dealings with the ATO, would reasonably have concluded that Akai was now out of its temporary liquidity difficulty and would have had no suspicion that Akai was insolvent. Orders

75 For these reasons, I am of the view that the ATO has established its defence under s.588FG(2)(b)(ii). The Liquidator having conceded that the other elements of a defence under s.588FG(2) have been established, it follows that the Liquidator's Amended Originating Process should be dismissed. - oOo -

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