D'Aloia v Commissioner of Taxation of the Commonwealth of Australia

Judgment (14 paragraphs)

[1]

REASONS FOR JUDGMENT 1 The first plaintiff Mr D'Aloia ("the liquidator"), who was appointed as the liquidator of Damark RV Investments Pty Ltd (in liquidation) ("Damark") on 21 December 2001, has applied for an order pursuant to s 588FF(1)(a) of the Corporations Act 2001 (Cth) ("the Act") that the Commissioner of Taxation ("the Commissioner") pay the sum of $758,450.90 to Damark. The sum claimed by the liquidator is constituted by 15 payments made in respect of Damark's taxation liabilities totalling $722,414.96 paid by Damark to the Commissioner and three payments made in respect of the taxation liabilities of Gralyn Investments Pty Ltd ("Gralyn") totalling $36,035.94, paid by Damark to the Commissioner ("the relevant payments"). The relevant payments were all made to the Commissioner between 6 June 2001 and 7 November 2001. 2 The liquidator claims that the relevant payments in respect of Damark's taxation liabilities constituted unfair preferences pursuant to s 588FA of the Act and the payments in respect of Gralyn's taxation liabilities constituted uncommercial transactions under s 588FB of the Act. Under the Act, when a transaction results in a creditor receiving more than the creditor would receive if the creditor had to prove the debt in the winding up of the company, the transaction constitutes an unfair preference: see s 588FA. A transaction is an uncommercial transaction if a reasonable person in the company's circumstances would not have entered into the transaction having regard to the benefit and detriment to the company in doing so: see s 588FB. 3 The taxation liabilities the subject of the relevant payments primarily comprised group tax ("PAYG") payable under subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 (Cth), but also included Goods and Services Tax ("GST") payable under s 33-5 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) and interest. 4 The provisions of the Act that are applicable to the liquidator's claims are as follows: Section 588FA(1) provides: "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; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency." Section 588FB(1) provides: " A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter" 5 Subject to s 588FG, where an unfair preference has been given, or an uncommercial transaction has been entered into, the transaction is voidable and the Court is empowered to make orders directing a person to pay to the company an amount equal to some or all of the amount the company paid under the transaction, provided that the transaction was made within the relation-back period and was an "insolvent transaction": see ss 588FE(2), 588FE(3) and 588FF(1)(a). The relation-back period in the present case for the unfair preferences is the six month period ending on the relation-back day, being 23 November 2001, which is the date on which Damark entered into administration: see ss 9, 513B and 513C of the Act. Although the relation-back period for uncommercial transactions is the two year period ending on the relation-back day that is of no significance in the present case as all of the relevant payments were made within the six month period ending on 23 November 2001. 6 Relevantly, an "insolvent transaction" is one in which an unfair preference has been given by the company, or an uncommercial transaction has been entered into by it, when it is insolvent, or becomes insolvent because of the transaction: see s 588FC. Accordingly, in order to determine whether the relevant payments constituted insolvent transactions the liquidator must establish that Damark was insolvent when the payments were made. Section 588E(3) of the Act creates a rebuttable presumption of insolvency if the company is being wound up and it is proved that the company became insolvent during the period of 12 months ending on the relation-back day. Section 95A defines insolvency as follows: "(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent." 7 Section 588FG(2) provides: "A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if …it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent …; and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction." 8 Before turning to consider the Commissioner's defence under s 588FG(2) it is appropriate to determine whether Damark was insolvent when the relevant payments were made and whether the transactions constituted by the relevant payments were unfair preferences or uncommercial transactions. 9 The liquidator's evidence, which was not challenged, was that Damark was "probably insolvent" from when it commenced trading on 1 July 2000, and was "clearly insolvent" between 30 September 2000 and 23 November 2001 when the administrator was appointed. The evidence was to the effect that the value of Damark's assets decreased from month to month, and liabilities increased monthly, so that Damark was "balance sheet insolvent on or about 30 September 2000". Damark had been pressured by many of its creditors to pay its debts to those creditors from at least February 2001. However, the financial statements indicated "that the company's liquid assets were insufficient to meet its current liabilities at any point during the life of the company". 10 The liquidator based his opinion as to Damark's insolvency during the relation-back period, and earlier, on the following matters: "(a) My review of the company's monthly management accounts indicates that the company had a deficiency of assets of $170,775 on 30 September 2000. The company's net asset position deteriorated each month until the date of my appointment when the company had a net deficiency of assets to liabilities of $3,305,518. (b) The company's monthly profit and loss statements indicate the company incurred a trading loss each month from the date it commenced operations to the date of my appointment, with the exception of January 2001. (c) The company defaulted on its obligations to the Defendant by failing to remit PAYG from November 2000 to April 2001… (d) The company could not meet the payment terms of its major suppliers from at least December 2000 … and was required to negotiate cash on delivery and repayment arrangements with a significant number of them. (e) Many of Damark's creditors, including the Defendant, had taken action by requiring the company to repay old debt by instalments. … (f) Other creditors had taken action placing Damark on COD terms and/or ceasing to supply the company. … (g) The amounts owed to Damark's creditors steadily increased from 1 July 2000 to the date of my appointment as administrator. (h) Based on a quick assets ratio test, for each $1 liability Damark did not have sufficient liquid assets at any time from the date of inception of the company to meet its current debts." 11 I am satisfied that the liquidator's evidence, and the presumption of insolvency under s 588E(3), establish that Damark was insolvent during the period in which the relevant payments were made. 12 I turn to consider whether the relevant payments constituted unfair preferences and uncommercial transactions. To constitute an unfair preference the creditor must have received more than it would have recovered if it had to prove the debt in the winding up of the company. The liquidator's evidence is that the payments were made to the Commissioner as an unsecured creditor, and unsecured creditors are likely to receive a maximum return of about four cents in the dollar. Thus, it is clear that the 15 payments made to the Commissioner within the six months to 23 November 2001 constituted unfair preferences. 13 Damark also made three payments totalling $36,035.94 between 16 July 2001 and 18 October 2001 in relation to Gralyn's taxation liabilities to the Commissioner. Gralyn was a related entity of Damark because the sole director of Damark was also the sole director of Gralyn: see s 9 of the Act. The liquidator contends it was unreasonable for Damark to have made the three payments because it received no benefit but, rather, suffered a detriment as its assets were depleted by the payments. However, the Commissioner contended that there was a fluctuating loan account and a service arrangement between Damark and Gralyn and, at the time the payments were made to the Commissioner, the loan owing to Gralyn decreased by $3,775. The Commissioner also relied on the liquidator's evidence that Damark used Gralyn's motor vehicles for its business although the liquidator regarded the motor vehicle aspect of the relationship as "minor". The Commissioner claimed that those matters prevented the payment of Gralyn's taxation liabilities by Damark from being an uncommercial transaction for the purposes of s 588FB: see Tosich Construction Pty Ltd (in liq) v Tosich (1997) 23 ACSR 466 at 474, affirmed in Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363. 14 The only benefit to Damark from making payments totalling in excess of $36,000 on behalf of Gralyn appears to have been the reduction in the loan account to Gralyn in the sum of $3,775 and, possibly, the use of some of Gralyn's motor vehicles. However, the evidence is to the effect that the benefit to Damark was minor compared to the amount it paid. I am not satisfied that, having regard to the matters set out in s 588FB(1), a reasonable person in Damark's circumstances would have made the payments. Accordingly, subject to any defence under s 588FG(2), I am satisfied that the three payments in question constituted uncommercial transactions. 15 Finally, it is necessary to consider the Commissioner's defence under s 588FG(2). The evidence establishes that the Commissioner received the payments in good faith, provided valuable consideration and changed his position in reliance on the payments. The issue in dispute is whether the Commissioner had no reasonable grounds to suspect Damark was, or would become, insolvent and whether a reasonable person in the Commissioner's circumstances would not have so suspected: see s 588FG(2)(b)(i) and (ii). 16 The burden is on the Commissioner to establish the defence under s 588FG(2): see Levi v Guerlini (1997) 24 ACSR 159 at 170. The meaning given to "suspicion" is well settled. In Queensland Bacon Proprietary Limited v Rees (1966) 115 CLR 266 ("Queensland Bacon") at 303 Kitto J stated: "A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to 'a slight opinion, but without sufficient evidence', as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which 'reason to suspect' expresses in sub-s.(4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors." In Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liquidation)) v Eurolinx Pty Ltd (2001) 37 ACSR 477 ("Sutherland") at 483-484 [43] Santow J observed: "The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather, it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time." 17 In Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 ("Pegulan Floor Coverings") at 658 Doyle CJ observed that s 588FG(2)(b): "is now cast in a demanding form. It requires a creditor, in the position of the present defendant, to establish a negative. The second of those negatives is, as subpara (ii) indicates, that a reasonable person in the defendant's position would have had no reasonable grounds to suspect insolvency. That is a fairly demanding test." 18 Although differing views have been expressed as to the precise ambit of the tests in s 588FG(2)(b)(i) and (ii) it is clear that the test in subpara (b)(i) is essentially a subjective test (albeit based on objective criteria) in so far as it requires consideration of whether the person "had" any grounds for suspecting insolvency whilst the test in subpara (b)(ii) is an objective test, as it requires consideration of whether a reasonable person in the Commissioner's circumstances had any reasonable grounds for suspecting insolvency. If the Commissioner fails to establish his defence under subpara (b)(i) it would usually follow that he must also fail under subpara (b)(ii): see Sands & McDougall Wholesale Pty Ltd (In Liquidation) v Commissioner of Taxation (Cth) [1999] 1 VR 489 ("Sands & McDougall") at 515. 19 In Sims v Celcast Pty Ltd (1998) 71 SASR 142 ("Sims") at 145, Williams J (with whom Cox and Mullighan JJ agreed) concluded that the reasonable person in the circumstances of the creditor (subpara (b)(ii)) is not necessarily to be equated with the creditor acting reasonably in its perception of events under subpara (b)(i). At 146 Williams J stated: "The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which (with the benefit of hindsight) can afterwards be shown to be flawed will not avail that creditor by reliance on subpar(b)(i) if a reasonable person should have read the signs differently; subpar(b)(ii) will still remain as a hurdle for that creditor. The circumstances of the present appeal may be an example of this lastmentioned situation. The signs were there for a reasonable person to read. The respondent's officers misread the signs. The trial judge must have read the signs only through the eyes of the respondent's officers rather than also through the eyes of the reasonable person (in the circumstances of the respondent or its responsible officers). The respondent's officers may have been overly generous in their assessment of a customer of good standing; alternatively they may have been blind to the facts which were staring at them. The hypothetical person referred to in subpar(b)(ii) would not have allowed personal perceptions to cloud a commercial judgment." 20 At 144 Williams J noted: "the provisions of subpar(b)(ii) require the court to look at the position through the eyes of an hypothetical person. In that lastmentioned situation the evidence of the creditor's knowledge and business qualifications may be used in a limited way for establishing 'the person's circumstances' which are to be brought to account in applying the test contained in subpar(b)(ii). Otherwise however, in applying subpar(b)(ii) the creditor's subjective appreciation of the facts will not be relevant unless that appreciation reflects that which would be expected by the 'reasonable person'." 21 In Wily v Commissioner of Taxation [2002] NSWSC 909 ("Wily") at [26] Hamilton J observed: "One must be careful not to apply hindsight, but the facts that I have set out above were not matters of hindsight. A reasonable person in the Commissioner's circumstances possessed of these facts must in my view have had at least a suspicion, ie, an actual apprehension or mistrust, that the company was insolvent (as indeed it was) and had that suspicion from the time of the first payment to the last … What does matter is that the propositions necessary to constitute a defence under s 588FG(2) have not been established in respect of any of the payments." 22 In Downey v Aira Pty Ltd (1996) 14 ACLC 1068 ("Downey") Ashley J stated at 1076: "sub-paragraph (b)(ii) makes it abundantly clear that proof of a negative - upon an objective consideration of the circumstances removed from the creditor (but not the creditor's circumstances) - is required before the creditor can make out a sub-section (2) defence." Mansfield J in Smith v Commissioner of Taxation (1997) 75 FCR 339 ("Smith") at 351 observed: "It may be necessary to address subpars (i) and (i) of subs (2)(b) separately. The question in each case is the same: Is it proved that the creditor had no reasonable grounds for suspecting that the company was insolvent at the time of the transaction? … The difference is only the perspective - it is either that of the creditor, or that of a reasonable person in the creditor's circumstances." In Cussen v Commissioner of Taxation (2003) 47 ACSR 107 ("Cussen") Palmer J considered the standard of "a reasonable person in the [creditor's] circumstances". His Honour stated at [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." 23 The source of the "average business person" criterion appears to be Queensland Bacon where Barwick CJ (at 287) referred to the knowledge of circumstances from which "ordinary men of business would conclude that the debtor is unable to meet his liabilities" and Kitto J stated (at 303):

37 The facsimile also stated that the loan, which was to be made by the Bank of Melbourne, would be for $800,000. Ms Francis' evidence is that, although the finance information in relation to the loan named four members of the Williams family as the borrowers, she had been under the impression that the loan was for Damark and was not a personal loan. Her evidence was that Mr Dal Cin had told her that Damark had applied for the loan. Ms Francis also stated that although the names on the facsimile included Mr Williams, she thought that because it said "Business Access Loan with Options Redraw" this meant it was a loan to Damark. When asked whether, if she had realised at the time that the loan was for Mr Williams personally this would have caused her concern about Damark's ability to pay its tax debts, Ms Francis replied "[i]t may have". 38 Ms Francis' narrative records that on 4 July 2001: "Mr Williams advised that he had a few problems with his business during the last year. One of his competitors had collapsed leaving a debt of $18m. The company had moved to new premises and the business had grown three fold. [Ms Francis] advised him that an AAP had been forwarded to him and Mr Lou Dal Cin was advised that it needed to be returned to the ATO to establish the companies [sic] solvency before any payment arrangement could be considered. As no financial information was forwarded to the ATO within the given time frame the solvency of the company couldn't be established. In accordance with Chapter 10.4.6 of the Commissioner's Policy 'Payment by Instalments and/or deferring legal recovery action' the debtor could not satisfy the Commissioner that they cannot pay by the due date, explain the reasons for non payment or satisfy the Commissioner that they are treating their tax debts with the same priority they are treating their other payment obligations." Ms Francis also recorded the details of the proposed loan as set out in the facsimile of 2 July 2001 and noted "Mr Williams hopes to pay the debt in full once the loan is finalised". Ms Francis then called the bank manager, Mr Sophoulls, who confirmed: "the loan was only a few days away from being finalised. The loan has been approved and is waiting on settlement of the property at …. This is a house that Mr Graeme Williams is purchasing as part of the loan and the other part of the loan is to restructure the business and payout the ATO … Mr Souphoulls expects everything to be finalised by 11/7/01." 39 On the same day Ms Francis spoke to Mr Dal Cin about the loan and advised "that in the interim the ATO would need the company to make voluntary payments". Mr Dal Cin advised that Damark had made two such payments for $30,000 each on 6 and 30 June 2001, and would be making another $30,000 payment that day, 4 July 2001 (payments of $30,000 were in fact made on 6 and 19 June and 6 July 2001). Ms Francis then advised that: "the ATO would still require the financial information previously requested. I indicated that this was the same information that would have been sent to the Bank of Melbourne with their loan request." 40 As Ms Francis still believed the loan was for Damark she "therefore assumed that to approve the loan, the bank would have viewed Damark's financial statements and had been satisfied that the business was viable". 41 On 9 July 2002 Mr Dal Cin contacted Ms Francis to say that payment in full of Damark's debt was expected to be made no later than 18 July 2001. However, on 16 July 2001 only partial payment of the then outstanding debt of $324,928.99 was made, namely $196,214.74, leaving $128,714.25 outstanding. Ms Francis' evidence was that, given that: "(a) Williams' had told me that the business had moved to new premises and had grown threefold … ; and (b) Both Williams and Dal Cin had advised me that Damark would have access to a loan sufficient to restructure the business and payout the ATO in full … and Mr Sophoulls the business banking manager, had confirmed this … I believed and expected that Damark was able to pay the Commissioner within a short period of time and pay any subsequent debts as they fell due." 42 On 23 July 2001 Ms Francis had further conversations with Mr Dal Cin and Mr Williams. Ms Francis informed Mr Dal Cin that the DPN issued to Mr Williams had not been complied with and legal action would continue. Mr Dal Cin advised that he expected that the remaining debt would be paid by the end of August 2001. Ms Francis advised this was not acceptable. When Ms Francis spoke to Mr Williams he advised that he needed "a couple of extra Fridays to pay off the debt … but failed to advise when the existing debt would be paid". Ms Francis reminded him that he had failed to comply with the DPN issued on 27 June 2001 and as a director of the company he was "personally liable for the debts of the company". Ms Francis stated: "I advised that the company has a poor compliance history and that the company has failed to produce financial information regarding the company's financial position. I advised that this information had been requested sometime ago and as yet has not been furnished to the ATO. The first AAP was sent to the client on 14/5/01 with a return date of 28/5/01. I advised that without any financial information the ATO would be proceeding with legal action. Mr Williams advised he was not in a position to give that information about the company. I advised that similar information would have been required when he applied for the bank loan for $800,000.00. He advised that it was him personally who had the loan with the Bank of Melbourne not the company … I advised the financial information had been requested some two months ago … The company continues to stall in providing financial information for reasons currently unknown to the ATO… The company has offered cash flow as a reason for non payment and the [accelerated] growth of the company. However without financial information from the company to support these claims the Commissioner is unable to establish that the company cannot pay by the due date and that the company is treating their tax debts with the same priority that they are treating their other payment obligations." 43 On 26 July 2001 a payment of $230,516 was made and a further payment of $39,000 was made on 30 July 2001, thereby discharging all outstanding taxation liabilities and placing Damark's account in credit in the sum of $140,465.95. Ms Francis' narrative notes that "[f]urther legal action on hold as client is continuing to pay substantial amounts towards the debt". Ms Francis' evidence was that "[g]iven that Damark had made payments sufficient to put its account into credit, as it had promised, I expected that the cashflow difficulties it had experienced earlier in the year had now been overcome." 44 However, on 29 August 2001 Ms Francis again contacted Mr Dal Cin regarding a new outstanding debt of $56,115.16. Payment of $20,000 was made on that same day. Ms Francis spoke with Mr Dal Cin on 3 September 2001 regarding the outstanding $36,115.16. The narrative notes: "Mr Dal Cin offered $20,000.00 per week to clear the debt. Mr Dal Cin advised that the company has a cashflow problem and he thought he would need additional time to make the payments … He advised by spreading the funds that were available to treat each of the creditors they had equally. I suggested if the company was not able to pay its taxation liabilities as and when they fell due, it could make voluntary payments each week towards the BAS liability. Mr Dal Cin thought the company would take up this option and thought they could afford $20,000.00 per week." 45 A further seven payments of $20,000 each were made between September and 7 November to the ATO, as well as a one-off payment of $6,684.22 and another $13,315.78 in respect of Gralyn's taxation debt. On 23 November 2001 Damark went into administration. The liquidator commenced this proceeding on 13 August 2002. On 14 August 2002 the Commissioner lodged a proof of debt with the liquidator for $181,970.02. 46 At no stage did the company forward to the ATO the AAP form which was to be returned by 28 May 2001. Ms Francis' evidence is that she attributed this to "disorganisation on the part of Damark". Ms Francis gave further reasons in cross-examination as to why she thought the financial information had not been provided: "the document that we sent out on AAP was quite a long and lengthy document and it asked for lots of financial information. I mean, if the company is going to pay the debt off in two months they probably thought, 'Well, I'm going to pay in full. I won't waste my time and my money on getting these financial statements when I'm going to pay in full.' That was my understanding: they were going to pay in full in less than two months' time." A little later Ms Francis explained that in her narrative for 23 July 2001, where she noted that Damark "continues to stall" in providing the financial records, she meant that they were wanting additional time to "prepare the financial information for the ATO". Ms Francis said that the ATO wanted the financial information: "to see how the company was trading and if the ATO was being treated as a preferred creditor or whether it wasn't or what the situation was. Because it was a new company we had no income tax returns to refer to for prior information about, you know, how the company was actually trading. There was nothing to refer back to, because they'd only just started." 47 Ms Francis also gave evidence that, in her experience: "many businesses treat trade creditors (upon whom they rely for supplies) with a greater priority than the ATO. In this respect, I have found that businesses sometimes effectively treat the ATO as a financier on the basis that the general interest charge is less than the interest rate on borrowings that they would have to pay a bank." 48 Ms Francis also stated that the Commissioner had stated publicly that with the introduction of the New Tax System, including GST, on 1 July 2000 the ATO would take an approach of assisting taxpayers who were not meeting their obligations at this time. In that regard the Commissioner had issued a press release on 20 July 2000 which stated: "I have already indicated that people who have made a genuine attempt to implement The New Tax System will continue to see the supportive face of the Tax Office over coming months. Where inadvertent errors are made, our focus will be correcting the error rather than penalising the business. We have no desire to see viable businesses put out of business through a debt with us caused by such a mistake. Our policies and actions will reflect that. … In saying this I recognise that cash flow is a core business competency and that most businesses successfully manage this on a day to day basis." Ms Francis' evidence was that she was instructed to take an empathetic approach to her debt collection role, and this applied to Damark even though its problems related substantially to PAYG, rather than GST. Ms Francis stated: "My understanding was that the business had problems and the Commissioner believed that all taxpayers are honest. So therefore they would be treated, you know, with fair and reasonable treatment. So if they were making payments and they could make payments, the Commissioner would look at additional time for them to get back on track if it was a cash flow problem, whatever the circumstances were." 49 In contending that there were reasonable grounds to suspect insolvency the liquidator relies upon the following facts: Damark was in arrears in respect of its PAYG and GST liabilities for over six months; a cheque was dishonoured in April 2001; financial information was required to establish that Damark was able to pay its debts but was not provided; the debts to be paid were substantial recurring debts that Damark was required to pay as a cost of conducting its business; Damark appears to have been unable to pay its debts as and when they fell due; when the outstanding debts were paid the payment was as a result of a loan, not to Damark, but to members of the Williams family; and, the debt was only paid in full after Mr Williams had been issued with the DPN. 50 However, the Commissioner contends that there were countervailing circumstances that weighed against the requisite suspicion. He relies upon the following matters: Mr Williams had advised that the business was expanding as a reason for the cash flow difficulties; proposals to pay by instalments had been proffered by Damark; Ms Francis was unaware other creditors had not been paid; the ATO had not seen any accounts of Damark that suggested it was unable to pay its debts; the arrears were during a period in which a new tax system had been introduced and the ATO had been instructed to adopt an empathetic approach to non-compliance; Damark, stating that it intended to clear all ATO debts, made "voluntary" payments even though there was no arrangement for repayment in place; some taxpayers will pay the Commissioner after other creditors and use the ATO as a financier; and Damark was responsive and paid its taxation liabilities "when pushed to do so". 51 The matters that bear on Damark's solvency and would have been significant to a reasonable person in the Commissioner's circumstances are as follows. When Damark's file was referred for debt collection in May 2001 Damark owed over $230,000 to the Commissioner. Although some payments were made in April (which included an initially dishonoured cheque), Damark appears to have been in difficulty in meeting its taxation liabilities to the Commissioner. On 8 May 2001 Damark's accountant informed the Commissioner that, although the company had a "cash flow problem", he "hoped to have access to additional funds" from the bank by 14 May 2001. In accordance with the Commissioner's usual procedures Damark was required to propose a repayment plan for its arrears and to complete an AAP form to "stop the ATO from commencing legal action to recover the outstanding debt". The combined requirement of a repayment plan and completion of the AAP form was significant as it is plain that the information required by the Commissioner was required, inter alia, to enable him to ascertain whether Damark was, or was not able, to pay its debts (including its taxation debts) as and when they fell due. The failure of Damark to satisfy the combined requirement afforded reason for concern about Damark's solvency. I would add that I do not accept that a reasonable person would regard the cost or complexity of completing the AAP form as a reason for not returning it. It was sent by the Commissioner to Damark when a substantive amount was outstanding and was required to be returned as a precondition to the Commissioner accepting an offer to pay Damark's arrears by instalments. 52 On 9 May Mr Williams informed the Commissioner that Damark's "cashflow problems" had been caused by market factors but that refinancing, that would put the business on a "positive footing", would be forthcoming prior to the end of May 2001. Mr Williams proposed repaying the stated arrears of $345,718 by fortnightly payments of $29,000 over six months and, as from 1 June 2001, meeting all current taxation liabilities as they fell due. Damark was informed the repayment plan could not be approved until the AAP form was returned. The repayment plan was formally rejected on 18 June 2001 when Damark received a letter of demand requiring payment of the arrears of $303,957.27 within seven days. On 27 June 2001, after receiving no response to the letter, the Commissioner issued a DPN. Although two voluntary payments of $30,000 had been made during June, as at 27 June the outstanding debt stood at almost $275,000. 53 Thus, by the end of June 2001 it appeared that Damark was unable to pay its outstanding taxation liabilities. It had stated that refinancing from the bank would put its business on a positive footing but the refinancing had failed to materialise. Its offer of repayment had been rejected because, inter alia, it had failed to return the AAP form that would establish Damark's ability, or inability, to pay its taxation, and other, debts. While it had made some voluntary repayments the arrears remained substantial. The issue of the DPN to Mr Williams on 27 June 2001 was significant as the notice would not have been issued had the letter of demand been complied with. Also, a reasonable person would infer that when the letter of demand was sent Damark appeared to be unable to pay its taxation liabilities. Damark's failure to meet the demand tended to confirm that inference. Put simply, the period in which the Commissioner may have been entitled to give Damark the benefit of the doubt as to its capacity to pay its outstanding tax debts had run out. Further, although the Commissioner had no information about Damark's other creditors he had no reason to believe they were being paid in preference to the Commissioner. In that regard it is relevant to note that compound interest was running on the arrears at 13.86 per cent. In all the circumstances Damark's failure to comply with the letter of demand afforded further grounds for concern about its solvency. 54 Prior to 27 June 2001, having regard to all of the circumstances, including the voluntary payments and statements of bank refinancing made prior to that date, I am prepared to accept that the Commissioner, and a reasonable person in the Commissioner's circumstances, had reasonable grounds for suspecting possible, rather than actual, insolvency. However, by the end of June 2001 I am satisfied that an average business person, and a reasonable person with the business qualifications of a person charged with debt collection responsibilities in the ATO, with the knowledge of the relevant circumstances possessed by the ATO, would have had reasonable grounds for suspecting, in the sense of an actual apprehension or mistrust, that Damark was unable to pay its debts as and when they fell due. The main factors, cumulatively, that would have justified the requisite suspicion at that time are: · the taxation arrears extended back over six months and were substantial; · the arrears were in respect of a substantial business debt which, like rent and salary, was a basic, continuing and recurring cost of conducting Damark's business; · Damark's inability to pay such debts over a period in excess of six months, without an adequate explanation, was a strong indicator that it was insolvent, particularly after it failed to comply with the ATO's letter of demand; · no adequate explanation had been offered by Damark for its inability to pay its taxation liabilities; · Damark failed to provide the financial information required by the Commissioner to establish Damark's solvency and no satisfactory explanation was given for that failure; · the bank refinancing, which was twice stated by Damark to be available before the end of May 2001, had not materialised; · Damark had made only slight progress in reducing its arrears and had not demonstrated any ability to meet its current recurring taxation liabilities; · it was not suggested by Damark that the "cash flow problems" being experienced by it had been caused by the introduction of the new taxation system or by any other "one-off" circumstance; · no information had been provided to the Commissioner to the effect that Damark was solvent or was able to pay its debts, including its taxation debts; rather, all that had been stated was that Damark had "cash flow problems caused by market factors"; and · after failing to comply with the Commissioner's earlier requirements concerning a repayment plan Damark also failed to comply with the Commissioner's letter of demand and, as a consequence, the DPN was issued to Mr Williams. 55 The main factor that has led me to move from finding reasonable grounds for suspecting "possible" insolvency prior to 27 June 2001 to reasonable grounds for suspecting actual insolvency by the end of June 2001 is Damark's failure to comply with the letter of demand or to forward a repayment plan with the duly completed AAP form along with the issue of the DPN to Mr Williams. 56 I am not satisfied that any of the events that occurred, or the information provided, after the end of June 2001 would have removed the reasonable grounds I have found would have justified the requisite suspicion as at that date. The most relevant event after 27 June 2001 was the availability of the bank loan to enable Damark to pay its outstanding taxation debt. That might have assisted in negating the requisite suspicion. However, it was made quite clear to Ms Francis on 2 July that the loan was to members of the Williams family, rather than to Damark. Further, although the arrears were reduced as a result of the loan, the payments reducing the arrears simultaneously reduced the liability of Mr Williams, which had arisen as a result of the DPN. Thus, the reduction in the arrears might reasonably be seen as deriving from Mr Williams', rather than Damark's, funds. Also, as was noted in the DPN, Mr Williams was "entitled to be indemnified by the company" in respect of any amount paid by him pursuant to the DPN. In any event, if the payments reducing the arrears were made as loans to Damark the consequence was that there was no change in Damark's overall indebtedness: see Re RHD Power Services Pty Ltd (in liq) (1990) 3 ACSR 261 at 263 and Harrison v Lewis (2001) 19 ACLC 566 at 578-579. Finally, in so far as the repayments may have been made out of Damark's funds the hypothetical reasonable person would recognise that, faced by the demands of the Commissioner against it and Mr Williams, Damark would probably be "delaying other creditors to meet the Commissioner's demands, in effect robbing Peter to pay Paul": see Wily at [24]. 57 For the above reasons, at best, the availability of the bank loan to reduce Damark's taxation liabilities after 30 June 2001 was a neutral factor. More probably, the reasonable person would have regarded the failure of Damark to obtain a loan in its own right as confirming the suspicion that person would have had at the end of June 2001. 58 It is correct that Mr Williams also provided additional information about the reasons for Damark's cash flow difficulties. However, that information (a competitor's collapse, moving to new premises and a three-fold growth in business) was stated only in the most general terms. The information that was more relevant was that requested in the AAP form which Ms Francis continued, without success, to request. 59 In any event, notwithstanding the bank loan and further requirements for payment by the Commissioner, Damark continued to remain in arrears until the end of July 2001. By the end of August Damark was once again in arrears in respect of its liabilities to the Commissioner. 60 Earlier in these reasons I outlined details of all of the relevant events between 27 June 2001 and 7 November 2001 when the last of the relevant payments were made. I am not satisfied that the occurrence of those events would have negatived the requisite suspicion the hypothetical reasonable person would have held by the end of June 2001, namely that there were reasonable grounds to suspect that Damark was unable to pay its debts as and when they became due and payable. I would add that, for the same reasons, I am also not satisfied that the Commissioner, who may be treated as Ms Francis for present purposes, had no reasonable grounds to suspect Damark's insolvency when each of the relevant payments was made after the end of June 2001. 61 It follows that the Commissioner has failed to establish his defence under s 588FG(2)(b) in respect of any of the payments made after 27 June 2001. However, for the reasons given above, he has satisfied me that his defence under the subsection in respect of his position, and that of a reasonable person, has been made out in relation to the two relevant payments of $30,000 made during June 2001. 62 Accordingly, the liquidator is entitled to an order under s 588FF(1)(a) that all of the relevant payments made after 27 June 2001 are avoided and that the Commissioner repay those payments, which total $698,450.90, together with any interest payable thereon pursuant to statute. In accordance with the liquidator's submissions I have provided for interest to be payable from 30 January 2002, being the date of demand for payment: cf Smith at 373. As the liquidator has substantially succeeded in his claim he is also entitled to his costs of and incidental to the proceeding. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

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