F. Even if the arrangement with the Commissioner was solemnly kept, at the end of the six months, the Company would still owe him a very substantial sum.
35 To this Mr Newlinds says one must add the factor that the Company was known by the Commissioner's officers to be a Phoenix Company whose previous incarnation had died owing the ATO about 2.5 million dollars.
36 A Phoenix Company is a term used to describe a company which has a similar name to a failed company trading in the same line of business and with much the same directorate.
37 Mr McGovern says that whether or not the Company was a Phoenix Company is immaterial. I beg to differ: the matter would be of some significance to a business person. However, I would not give the factor as much weight as Mr Newlinds gives it.
38 Mr Newlinds says that this evidence alone shows that the Commissioner must fail in his attempt to show that he had no reason to suspect insolvency in this first period. He says this is not a case of temporary lack of liquidity as submitted by the Commissioner but total lack of liquidity which would get worse once the six month arrangement with the ATO came to an end.
39 The question is a question of fact to be evaluated according to the tests set out above.
40 (1) I will first consider what I have called the first period.
41 In my view the Commissioner has failed to satisfy the test even up to 20 August 1998. I consider that the matters elicited from Mr Elmer and the Phoenix Company status show objective material which a person would find raised a suspicion of insolvency.
42 The position after 20 August 1998 does not get any better for the Commissioner. Mr Newlinds says it gets worse.
43 When the first six month period of the arrangement had expired on 20 August 1998 Mr Elmer renewed the arrangement until 28 February 1999 without taking proper precautions to obtain adequate information as to whether the Company was paying other creditors and had filed its statutory returns with the ATO which were due.
44 In view of the decision of the Court of Appeal in Cussen v Commissioner of Taxation [2004] NSWCA 383, I consider what the Commissioner could have found out had his officers made enquiries is immaterial.
45 However, it is said that as at 14 August 1998 the Company should have filed statutory returns with the Commissioner but failed to do so.
46 It was at least impliedly submitted that an officer of the Commissioner must have known as at 20 August 1998 that those returns had not been lodged.
47 The general law cases show a distinction between being aware of something and appreciating its significance. Both processes must usually be undergone before one can be said to "know" that something: R v Barnier [1980] 1 SCR (Con) 1124, 1136-7; Cooper v Reg [1980] 1 SCR 1149, 1161.
48 The matter of when one knows a negative is even more complicated.
49 It is probably correct to say that some computer or file somewhere in the ATO would have recorded that no return had been received by the due date. However, I should not presume that that negative fact was appreciated by any ATO officer. I also consider that the mere fact that a taxpayer is six days late in filing a return is not weighty material on the matter of solvency.
50 Mr Newlinds says that the fact that the Commissioner knew that the information about other creditors had not been requested or provided in the context of the rest of the facts of this case must have increased the level of suspicion in the mind of a reasonable person.
51 I think this is correct in theory, but in my view the level is only increased by a scintilla.
52 Again the gap between the expiry of the second arrangement at the end of February 1999 and 12 April 1999 does not raise any additional matters.
53 Thus, for the whole of the first period, I do not consider that the Commissioner has discharged the onus cast on him by the statute.
54 (2) On 12 April 1999 itself, the Commissioner received $336,889.87. It is true that Mr Howard did not have time to read through all the documents when these monies were received, and indeed, they may even have been paid to a different officer. It is clear that Mr Howard (and his predecessors Mr Elmer and Ms Beck) themselves had no actual knowledge of the full state of affairs and that each may have believed (either because of inadequate conceptions as to what was an insolvent company or otherwise) that the Company was not insolvent.
55 Part of the problem in this case is that the first defendant relies on the lack of knowledge of the three officers called. On the other hand, the liquidator says that the Commissioner has the collective knowledge of all of his staff. For administrative reasons, the Commissioner's functions are split between various divisions and it would seem that there is almost a complete firewall between some of the divisions. Thus the officers who receive the reconciliation statements from tax payers work completely separately from the officers who receive payments of money, who work completely separately from the officers charged with collecting default payments and so on.
56 Mr Newlinds and Ms Painter say that the way the Commissioner organises his affairs is of no moment and that the cases show that one must find out the Commissioner's state of mind and put together the sum total of all his officers' knowledge (notwithstanding that no one set of officers might on the limited amount of data which was in their possession have been able to inform the relevant opinion).
57 Generally speaking, the proposition of Mr Newlinds and Ms Painter must be correct.
58 The point arose for decision as long ago as 1892 in the Privy Council in the preference case of National Bank of Australasia v Morris [1892] AC 287, 290. Lord Hobhouse there noted "Whatever may have been the state of Balfour's (the Bank's Sydney Manager) knowledge, it is the bank who are sued, and they cannot get rid of knowledge which is brought home to them in Melbourne by alleging the ignorance of their agent in Sydney."
59 The same point would seem to follow from the High Court's decision in Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563, 582 and from the decision of the Court of Appeal in Cook's Construction Pty Ltd v Brown (2004) 49 ACSR 62.
60 However, Mr McGovern says that Palmer J in Cussen v Commissioner of Taxation (2003) 47 ACSR 107, supports his proposition. In that case Palmer J at [68] pp 119-120, remarked that there was no evidence that officers in the Tax Return Department were under a duty to pass information to officers in the Sales Tax Collection team or vice versa, and accordingly, failure to make investigation did not put officers on constructive notice of what they would have discovered had they made enquiry. His Honour was dealing with an argument arising under s 588FG(2)(b)(ii). His Honour rejected the proposition that a reasonable business person routinely makes his own enquiries into a debtor's financial position from all available sources before agreeing to extend time for payment. He said such an assumption was unrealistic and unreasonable.
61 The Cussen case went on appeal. The reasons for judgment dismissing the appeal were handed down after the oral argument and after the first draft of these reasons were prepared. Both sets of counsel then furnished additional submissions in writing which I found quite helpful.
62 I have already referred to the Cussen case on appeal. It is important to realise that it is a case dealing with the objective test in s 588FG(2)(b)(ii) and not with the subjective test under s 588FG(2)(b)(i) which I am currently considering.
63 The leading judgment in the Cussen case on appeal was delivered by Spigelman CJ with whom Handley and Tobias JJA agreed.
64 As to s 588(2)(b)(i), the learned Chief Justice said at [102]:
"The proposition advanced in these proceedings would establish a significant difference between (b)(i) and (b)(ii). The reference in (b)(i) to 'had no reasonable grounds' cannot readily be construed to extend to the results of further inquiries. The reference in (b)(ii) to 'would have had no such grounds' could so extend. The issue that arises is whether, on the proper construction of (b)(ii), it does."
65 At [80] the Chief Justice reproduced [67] and [68] from Palmer J's reasons without comment, though [84] of the Chief Justice's judgment must be taken to mean that he approved them.
66 However, very significantly for the present case, the Chief Justice said at [81]:
"Whether the ATO should be taken to have 'grounds for suspecting' on the basis of information available to, but not accessed in the normal course, by a particular sub-unit of a large organisation raises some difficult issues. It is not, however, necessary to resolve any such issue here."
67 Mr McGovern says that "In neither accepting or rejecting the issue, the Court of Appeal has in effect acknowledged that it is arguable. As Palmer J's decision is the only one squarely on point, it should be followed".
68 I would respectfully disagree. I would normally follow any decision of Palmer J as a learned and experienced Judge of this Division. However, for the reasons I have given, in my view his Honour never had to direct his mind to the present problem.
69 The Cussen case was decided in respect of the objective test and depended on what Palmer J and the Court of Appeal considered a reasonable person would have done. In the present case I am concerned with the subjective test, that is, what did the Commissioner have by way of reasonable grounds for suspecting insolvency.
70 Mr Newlinds put that it is important to emphasise that there are two separate and distinct questions under consideration. Care needs to be taken so as not to confuse argument relating to one with the other. The first is whether when considering the knowledge of a particular creditor does all of the information available within the various people who make up the "mind" of the creditor need to be aggregated? He puts that, for the reasons already considered, the answer to this question must be "Yes".
71 The second question is who a defendant must call in order to discharge its onus? As to this he submits that the cases I have already considered, particularly the Cook's Construction case show that the answer is "Every person who may reasonably be thought to have a relevant opinion to prove they did not suspect."
72 I am broadly in agreement with these submissions
73 When one is looking at the question under (b)(i), one does not concern oneself about constructive notice or the like. One does not even enquire as to what duty any particular officer had to relay information to any other officer of the ATO. One asks oneself, what does the Commissioner, by his servants and agents know and does that knowledge amount to reasonable grounds for suspicion? On this point the Cook's Construction case is clear. In my view, for the reasons given, one puts together all this information in the Commissioner's office and then asks oneself whether the Commissioner has satisfied the court that he had no reason to suspect insolvency.
74 There was some debate as to who might be other officers of the Commissioner who may well have relevant knowledge and who were not called. Messrs Macdonald and Thanarajah were suggested. I do not need to enter into this discussion as the way the legislation is structured, it is for the Commissioner to prove affirmatively that he in fact had no reasonable grounds to suspect insolvency.
75 Nor do I consider that it is necessary to note which officers of the ATO had a duty to refer to a superior knowledge in their possession.
76 Mr McGovern says that the cheques and reconciliation statements were received by Mr Howard more or less simultaneously, he had no time to read them, the payment was made when the cheque was accepted and thus any facts on the reconciliation statements were irrelevant when considering the second period.
77 Mr Newlinds acknowledges that the law as to cheques is correctly stated in that submission, but submits that it has little relevance to this case.
78 Mr Newlinds says that the time at which "good faith" and "suspicion" is to be determined is not by reference to the time that the particular "transaction" is completed. That is the relevant time is the time at which the "benefit because of the transaction" is received by the recipient.
79 He says that this construction is compelled from the following words and phrases of s 588FG(1) [emphasis added]:
· In (a) the words are "the person received no benefit because of the transaction".
· In (b) the words are "in relation to each benefit that the person received because of the transaction".
· In (b)(i) the words are "the person received the benefit in good faith".
· In (b)(ii) the words are "at the time when the person received the benefit".
80 The "benefit" is not the receipt of the piece of paper being the cheque, the benefit is the exchange of that piece of paper for money. In this case that does not happen until the cheque is banked and met.
81 Looked at in that way the Commissioner's conduct in banking the cheque after reading and understanding the reconciliations was an act in "bad faith". That is because the Commissioner continued to take the benefit of the cheque knowing of the insolvency of the Company.
82 I would broadly agree with these submissions, but for the reasons set out elsewhere I do not need to consider them in depth as in any event these matters do not materially add to the relevant material facts which tell against the Commissioner's position.
83 It is quite clear from what was revealed on 12 April 1999 that the returns which were due in August 1998 showed that the Company was in a very precarious position. I would infer from the evidence generally that there must have been some officers of the Commissioner who would know that the returns had not been received in August 1998. That knowledge, together with the material I have already reviewed for the first period mean to my mind that the Commissioner has not satisfied the subjective test in this second period as well.
84 (3) As to the third period, the situation is a fortiori. There is no doubt at all that Mr Howard knew he was dealing with an insolvent entity.
85 The Commissioner thus fails to satisfy the subjective test for all three periods.
86 In view of my conclusion on the subjective test, it is unnecessary to consider the cumulative objective test.
87 Accordingly, I do not need to deal with other matters raised, such as whether a reasonable person of business would have made enquiries as to whether the Company was paying other creditors which may have been relevant to a case under s 588FG(2)(b)(ii) at least before the Court of Appeal's decision in Cussen.
88 I should just add this. The ATO is to be commended for the humane and practical way in which the evidence in this case shows its officers deal with persons who are in difficulties. That attitude indeed probably produces more actual cash into the Treasury than any other approach. It will occur from time to time that some taxpayer will abuse that approach. It may also be that the laws respecting preferences nowadays operate unfairly against the ATO. I hope that neither of these last two points will operate to change the general attitude.
89 However, the distinct functions of different parts of the ATO do cause problems for the Commissioner in preference cases, as illustrated by this case and the Cussen case.
90 It follows that there must be a verdict for the plaintiffs for $1,773,782.71 plus interest and costs. I will publish these reasons and list the matter on Tuesday 23 November 2004 at 9.30 am for the purpose of considering what formal orders should be made and what the next step in the proceedings should be.