Dean-Willcocks v Commissioner of Taxation

CATCHWORDS : CORPORATIONS - winding up - recovery proceedings by liquidator - preferences received by Commissioner of Taxation - Commissioner asserts defence under s 588FG(2) - only issue concerns existence of reasonable grounds for suspecting insolvency - examination of state of knowledge of all relevant officers of Australian Taxation Office

LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss 588FA, 588FC, 588FF(1), 588FG(2), 588FG(3), 588FG(4)

Cooper (as liquidator of Wanted World Wide (Australia) Pty Ltd) v Commissioner of Taxation [2004] FCA 1063; (2004) 210 ALR 635 Cussen as Liquidator of Akai Pty Ltd v Commissioner of Taxation [2004] NSWCA 382; (2004) 51 ACSR 530 Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd v Commissioner of Taxation (No 2) [2004] NSWSC 286; (2004) 49 ACSR 325 Dean-Willcocks v Commissioner of Taxation [2004] NSWSC 1058; (2004) 51 ACSR 353 Hall (as liquidator of Reynolds Vineyards Pty Ltd) v Commissioner of Taxation [2004] NSWSC 950; (2004) 51 ACSR 169 CASES CITED : Harris (as liquidator of Denlizco Trading Pty Ltd) v Commissioner of Taxation [2006] QSC 108; 57 ACSR 706 Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 Queensland Bacon Pty Ltd v Rees [1966] HCA 21l (1966) 115 CLR 266 Sheahan v Fabienne Pty Ltd [1999] SASC 335; (1999) 17 ACLC 1600 Young (as liquidator of TransAustralian Pty Ltd) v Commissioner of Taxation [2006] FCA 90; (2006) 56 ACSR 654

Ronald John Dean-Willcocks and Nicholas Craig Malanos as Liquidators of Fashion Warehouse Pty Limited - First Plaintiffs PARTIES : Fashion Warehouse Pty Limited - Second Plaintiff Commissioner of Taxation - First Defendant Dennis Ungar - Second Defendant

COUNSEL : Mr S M Golledge - Plaintiffs Mr P D Rodionoff - First Defendant

SOLICITORS : Kemp Strang - Plaintiffs ATO General Counsel - First Defendant

• 21 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3107/06 RONALD JOHN DEAN-WILLCOCKS & ANOR AS LIQUIDATORS OF FASHION WAREHOUSE PTY LTD v COMMISSIONER OF TAXATION JUDGMENT

1 The first plaintiffs ("liquidators") are the liquidators of Fashion Warehouse Pty Ltd. In that capacity, they make application under s 588FF(1) of the Corporations Act 2001 (Cth) for an order directing that the defendant, Commissioner of Taxation, pay money to Fashion Warehouse. 2 The liquidators' claim is based on s 588FA and the proposition that Fashion Warehouse gave an "unfair preference" to the Commissioner on each of several occasions in the period 22 March 2004 to 23 July 2004 on which it made a payment to the Commissioner for or on account of a liability arising under taxation legislation. 3 As between the liquidators and the Commissioner, the controversy is narrow. The Commissioner concedes all matters of fact and law necessary to ground a conclusion that each of the payment transactions in question constituted an "unfair preference" within s 588FA and was, accordingly, an "insolvent transaction" within s 588FC. The Commissioner's concessions or admissions are, of themselves, sufficient to cause the court to be "satisfied" in the manner described in s 588FF: Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd v Commissioner of Taxation (No 2) [2004] NSWSC 286; (2004) 49 ACSR 325; Cooper (as liquidator of Wanted World Wide (Australia) Pty Ltd) v Commissioner of Taxation [2004] FCA 1063; (2004) 210 ALR 635; Hall (as liquidator of Reynolds Vineyards Pty Ltd) v Commissioner of Taxation [2004] NSWSC 950; (2004) 51 ACSR 169; Young (as liquidator of TransAustralian Pty Ltd) v Commissioner of Taxation [2006] FCA 90; (2006) 56 ACSR 654; Harris (as liquidator of Denlizco Trading Pty Ltd) v Commissioner of Taxation [2006] QSC 108; 57 ACSR 706; Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87. 4 It is the contention of the Commissioner, however, that the court is precluded by s 588FG(2) from making the order under s 588FF(1) sought by the liquidators. Section 588FG(2) is in these terms: "A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and 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 at that time or would become insolvent as mentioned in paragraph 588FC(b); 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." 5 It is accepted that the transactions in question (being payments by Fashion Warehouse to the Commissioner, as already briefly described) are not within the concepts of "unfair loan" and "unreasonable director-related transaction". It is accordingly also accepted that s 588FG(2) will prevent the grant of the relief the liquidators seek if each of the matters referred to in paragraphs (a), (b)(i), (b)(ii) and (c) of s 588FG(2) is proved. The onus of proof rests with the Commissioner. 6 For the purposes of paragraph (c) of s 588FG(2), attention must be given to s 588FG(3): "For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to pay tax, the discharge is valuable consideration provided: (a) by the person to whom the tax is payable; and (b) under any transaction that consists of, or involves, the payment or application." 7 Having regard to the definition to "tax" in s 588FG(4) (which need not be set out), the conclusion referred to in the first part of paragraph (c) of s 588FG(2) ("the person has provided valuable consideration under the transaction") is required by s 588FG(3) in relation to each transaction consisting of a payment by Fashion Warehouse to the Commissioner. That leaves for consideration paragraphs (a) and (b) of s 588FG(2). 8 As for paragraph (a), there is no suggestion that the Commissioner (being, in s 588FG(2) terms, the "person") received the several payments from Fashion Warehouse otherwise than in the due, proper and regular exercise of the Commissioner's statutory functions. It may therefore be accepted that the Commissioner, as recipient, became party to each payment transaction "in good faith". Ultimately, therefore, the focus is upon paragraph (b) of s 588FG(2). 9 Paragraph (b) directs attention to the circumstances existing at each time at which the Commissioner received and accepted from Fashion Warehouse a payment for or on account of its taxation liabilities. Two questions arise in relation to each such occasion: first, whether the Commissioner had "no reasonable grounds for suspecting" that Fashion Warehouse was insolvent at the time in question (or would become insolvent because of the payment, or matters including the payment); and, second, whether "a reasonable person" in the Commissioner's "circumstances" would have had no such reasonable grounds for so suspecting. 10 As Bryson J pointed out in Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 at [46], the first of these inquiries is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by the Commissioner, while the second is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by a reasonable person in the Commissioner's circumstances. I do not think it is all that helpful to attempt to characterise one inquiry as "subjective" and the other as "objective". One should merely approach the two inquiries according to the terms in which they have been expressed by the legislature. I would, however, respectfully endorse Bryson J's observation (at [46]) that "it would be seldom that the two tests would produce different results, although it is conceivable that a person might be afflicted by some personal difficulty in forming a suspicion." 11 His Honour thus accommodates the possibility that the actual frame of mind of the particular person may be affected by factors to which the mind of the hypothetical "reasonable person" would be impervious, even though each formed a judgment on "reasonable grounds". And the "reasonable person" to whom regard is to be had is, as the Court of Appeal confirmed in Cussen as Liquidator of Akai Pty Ltd v Commissioner of Taxation [2004] NSWCA 382; (2004) 51 ACSR 530 at [31], a "reasonable business person". 12 The relevant concept of "suspecting" - or "suspicion" - is that referred to by Kitto J in Queensland Bacon Pty Ltd v Rees [1966] HCA 21l (1966) 115 CLR 266. It is more than idle wondering. It is a positive feeling of actual apprehension or mistrust without sufficient evidence. 13 It is important to emphasise that the relevant suspicion is one of actual and existing insolvency, as distinct from impending or potential insolvency. That, as the Full Court of the Supreme Court of South Australia pointed out in Sheahan v Fabienne Pty Ltd [1999] SASC 335; (1999) 17 ACLC 1600, is something that was made clear in Queensland Bacon Pty Ltd v Rees (above). 14 The last matter to be mentioned before I turn to the specifics of this case concerns the process of ascertaining the state of suspicion (or otherwise) with which an official such as the Commissioner of Taxation must be fixed. 15 It was said by Young CJ in Eq in Dean-Willcocks v Commissioner of Taxation [2004] NSWSC 1058; (2004) 51 ACSR 353 that the Commissioner's state of mind must be the sum total of his officers' knowledge, so that, in order to discharge an onus of the kind relevant to this case, the Commissioner must call on all officers who may reasonably have a relevant opinion about solvency. Some doubt seems to be cast on this by an observation of Spigelman CJ in Cussen as Liquidator of Akai Pty Ltd (above) at [81]. The matter is, however, one that I do not need to pursue since, as will be seen, a number of officers of the Australian Taxation Office ("ATO") have given evidence and there is no basis for thinking that knowledge of any other is relevant. In other words, the Commissioner seems to have approached the matter on the footing that he must prove his defence by reference to the state of knowledge of all officers with an exposure to the case. 16 It is, as I have said, necessary for the Commissioner to prove the two negative propositions in paragraph (b) of s 588FG(2). That task arises, however, in a context where the liquidators point to various factors which they say must have engendered relevant suspicion on the part of the Commissioner and the hypothetical "reasonable business person". 17 The payments under attack were made in the period 22 March 2004 to 23 July 2004. More than two years earlier, Fashion Warehouse had executed a deed of company arrangement after being placed in voluntary administration under Part 5.3A of the Corporations Act. The voluntary administration began on 5 August 2001. The deed of company arrangement was executed on 18 September 2001. 18 It must be accepted that Fashion Warehouse was insolvent at the time of the voluntary administration and immediately before the execution of the deed of company arrangement. The deed made provision for the creation and application of an "administration fund" consisting principally of moneys to be provided by Fashion Warehouse out of the proceeds of its ongoing business activities by 23 monthly payments of $14,972.00 - a total of $359,327.00. 19 The deed provided that, once creditors with claims that had arisen before 5 August 2001 had been paid "their full entitlements under this Deed", their debts existing at that date would be extinguished. The deed also imposed a prohibition to the effect that a creditor must not, before termination of the deed, sue for any debt incurred or alleged to have been incurred before 5 August 2001. The deed thus acted as a bar to such actions, unless and until it was terminated. 20 As at 5 August 2001, the Commissioner was a creditor of Fashion Warehouse. The debt was of the order of $1 million. 21 The effect of the deed of company arrangement was noted in the Australian Taxation Office's computer records on 3 September 2001. It was recorded that the second meeting of creditors had approved the deed and that "we will receive a dividend of roughly 10 cents in the dollar to be paid in around 2 years". The file note continues: "It is a condition of the deed that the company meet their ongoing taxation liabilities. If they fail to do so we should advise the deed administrator. They will then be obliged to call a meeting of creditors where we will have the opportunity of terminating the deed and winding up the company." 22 This was a reference to clause 10.4 of the deed of company arrangement: "Without limitation to this clause 10, upon receipt of a request from the Deputy Commissioner of Taxation to convene a meeting of Creditors pursuant to Section 445F of the Corporations Act, because of the failure by the Company to remit an amount to him with respect to the Company's Future Taxation Obligations, the Administrator shall, within 5 business days of receipt of such notice, convene a meeting of Creditors accordingly." 23 In May 2002, there was a recommendation within the ATO that $893,382.31 of Fashion Warehouse's debt be written off, leaving a balance of $99,265.00, being the expected dividend under the deed of company arrangement. The write-off occurred on 26 June 2002. This, of course, did nothing to change the rights of the Commissioner or the obligations of Fashion Warehouse. It was merely a recognition by the Commissioner, in internal records, of the expected irrecoverability of the amount written off, in the light of both the present and the expected operation of the deed of company arrangement. 24 Having regard to the deed provisions, extinguishment of pre-existing debts occurred upon full effectuation of the deed in the way I have mentioned. In the events that happened, that full effectuation occurred on 30 August 2004. And at all times from the inception of the deed until 30 August 2004, the pre-August 2001 creditors were precluded from suing for their debts. This regime was binding on all creditors in respect of pre-existing debts by virtue of the force given to the deed of company arrangement by the Corporations Act. 25 On 31 August 2004 - the day immediately after full effectuation of the deed of company arrangement - Fashion Warehouse again entered voluntary administration pursuant to a determination of its directors. It was from that administration that the winding up presided over by the present plaintiffs as liquidators arose. 26 For almost three years before the commencement of the new administration, Fashion Warehouse had carried on business and continued to trade. Funds generated by its business activities were, over time, transferred to the deed administrator until the total of $359,372.00 had been accumulated and the deed fund was complete. It seems that this may have taken longer than the envisaged 24 months, but nothing was made of that in submissions. 27 The Commissioner must be taken to have been aware, throughout the period until the effectuation of the deed of company arrangement, that Fashion Warehouse was in a work-out situation - but, of course, one which caused actions for recovery of its pre-August 2001 debts to be stayed and would see it freed of those debts on completion. Because of the operation of the deed, Fashion Warehouse was enabled to devote new resources to new debts, except to the extent necessary to cause the deed fund to be assembled. 28 During the post-deed period up to 22 March 2004, Fashion Warehouse had duly and punctually discharged all post-deed tax liabilities (short payments of 13 cents in September 2001 and 31 cents in October 2001 may be ignored for these purposes). The payment made on 22 March 2004 was also in full and on time. There was no default in relation to superannuation of which the ATO became aware. 29 Soon afterwards, however, there was default in payment of GST for the March 2004 quarter and ITW (or income tax withholding - perhaps better understood as "group tax") for the month of March. Both should have been paid in April. On 10 May 2004, the managing director of Fashion Warehouse sent to the ATO by fax a letter referring to "our recent conversation with your department" and requesting a "payment arrangement for the BAS period January to March 2004 for the amount of $70,178.00". This was, in fact, the aggregate of GST and ITW payments due in April 2004. The letter proposed "weekly payments of $6,000.00 starting Tuesday May 11, 2004 until the total outstanding amount is paid in full". 30 A file note within the ATO refers to this fax as having been received on 21 May 2004. The file note reads as follows: "21/05/04 12:23 UAVZ4, GREGORY, PETER RMS Proposal to finalize o/s at $6000 per week received via fax on 21/5/04. Facsimile dated 10/5/04 and faxed to (03) 9275 2915 ? History is poor, this office having written-off some $800K when Coy appointed Administrator in 2001 on last day of expiration of a DPN. (See notes under CAC1) A review of Coy's history since the Coy Deed of Arrangement was executed, reveals good compliance with lodgment/payments of BAS's. However, IT returns for Y/E 2002 and 2003 are not yet lodged and overdue. Rang Tom Mayer (Coy contact - (02) 9318 7608) and he will make enquiries re: IT returns and advise someone to call me back. Regarding the proposal to pay MAE04 BAS, he advised that Coy has a short term cashflow problem. ITW for APR04 is being made today and does not expect any further problems. I will await response to IT returns before confirming acceptance/rejection of proposal. Peter Gregory (APS4) OPS/Large/DAN X21437" 31 The file note refers to several pertinent matters, in addition to the request for an instalment payment arrangement. There is reference to the company's "history" being "poor", but this relates, clearly enough, to the insolvency of 2001 from which the deed of company arrangement arose. It is then noted that there has been "good compliance with lodgment/payments of BAS's" since the advent of the deed, thus indicating that lack of default in relation to GST obligations. In relation to income tax, however, it is noted that lodgment of returns for the then two most recently completed years (2002 and 2003) is overdue. Finally, there is reference to a person from Fashion Warehouse having said that the request for a payment arrangement was prompted by "a short term cashflow problem" (another ATO officer, Ms Riley, had been told by a representative of Fashion Warehouse (on 10 May 2004) that "trading has been slow"; also reference to ITW due in April 2004 being paid "today". 32 In light of this information, it was clear that the payment arrangement related to GST only and that the slightly overdue ITW was about to be paid. At the rate of $6,000.00 per month, the instalment arrangement would clear the arrears in less than three months. Furthermore, Fashion Warehouse had itself raised the matter of the arrears and proposed the payment arrangement. It was not a situation where the ATO was forced to pursue a defaulting taxpayer. 33 Consideration of the request for a payment arrangement became the responsibility of Mr Gregory, the ATO officer who was the author of the file note of 21 May 2004 set out above. Mr Gregory gave evidence that, in undertaking that task, he was concerned to obtain information about non-lodgment of the 2002 and 2003 income tax returns. To that end, he spoke on 4 June 2004 with Mr Costello, Fashion Warehouse's external accountant. Mr Costello explained that his firm had been attempting for some time to obtain information from the company's previous accountants regarding "loans in the books and records input by previous" accountants. Mr Gregory's contemporary file note continues: "They have not had a suitable response yet and are attempting to work out previous acct's calculations. This has been the reason for non-lodgment. His firm is endeavouring to obtain the necessary info to complete returns and is hopeful of receiving the info soon." 34 Mr Gregory then recorded his decision on the application for an arrangement for payment by instalments: "In view of above and that proposal is short, I will accept at $6,000 per week as proposed." 35 Mr Gregory sent a letter to Fashion Warehouse on 8 June 2004 confirming acceptance of the payment arrangement. 36 Fashion Warehouse had already made several weekly payments of $6,000 before the arrangement was accepted by the ATO. Mr Gregory gave evidence that this is common practice in such cases. Another ATO officer, Ms Legg, gave evidence of having spoken with a representative of Fashion Warehouse on 12 May 2004 when an inquiry was made whether the faxed request of 10 May 2008 had been received. She confirmed that it had been received but not dealt with. She suggested that payments begin immediately. 37 It is relevant to quote in full the following paragraph of Mr Gregory's affidavit: "During the period from 21May 2004, when I first came in contact with the company until 30 July 2004, I believed that the Company was able to make the proposed instalment arrangements and meet its other liabilities as and when they fell due. I believed the Company's assertions that its inability to pay the amount due in May 2004 was due to a temporary cash flow problem. I am not aware of any facts that came to my attention prior to 30 July 2004 or that were in the ATO's files prior to 30 July 2004 that should have made me suspect that the Company may in fact have been insolvent at that time." 38 Some of the extracts from the ATO's computer records related to periods after the deed of company arrangement was executed carry a notation "INSOLVE" or "INSOLVENT". It was explained in the evidence of Mr Seddon, however, that this cannot be taken as an indication that the Commissioner considered the company to be insolvent. Rather, it is the practice of the ATO to add such a notation to its computer records when voluntary administration occurs. The notation had thus been added in 2001. Furthermore, in a case where a deed of company arrangement is later executed, the notation is retained until the deed is fully effectuated and the company is no longer under any form of external administration. The notation serves as an indication that there is really no point in taking recovery action while it remains. 39 I turn now to evidence given by ATO officers in cross-examination about various matters put forward by the liquidators as relevant to the existence of a suspicion of insolvency. 40 The first such matter is default in discharging a payment obligation. Mr Seddon gave evidence as follows: "Q. In your experience with particular reference to the work in insolvency, would you agree that the seeking or making of an instalment arrangement by a taxpayer is an indicator of some level of financial stress? A. Yes.

Q. Would you agree that based on your work in, in particular, the insolvency section that that level of financial stress that precipitates the making of instalment arrangements can sometimes be an indicator of a company that is insolvent? A. Yes.

Q. And sometimes can be an indicator of a company that's heading inevitably into some form of insolvency administration? A. Well, sometimes, but you can't say that.

Q. You can't say that on its own? A. You can't say because the company is seeking an arrangement that it is going to end up in some sort of insolvency administration.

Q. It depends on a number of other factors attending on the account; would you agree with that? A. Certainly you can't just look at the fact that there is an arrangement alone.

Q. However, it is an indicator that an experienced tax officer would appreciate as being at least potentially relevant to an assessment of the taxpayer's financial position? A. It is something you would take into account, yes." 41 Mr Gregory's evidence on the matter was as follows: "Q. There are a couple of risks in dealing with taxpayers, one they don't lodge and two they don't pay, that's essentially the risks that a debt collections officer is trying to manage in your dealings with a taxpayer, aren't they? A. That would be correct.

Q. The disclosure by a taxpayer of an inability to meet on time a payment obligation is a situation which gives rise to such a risk of default, doesn't it? A. That would be correct.

Q. At least it raises the possibility that the non-payment is going to lead to eventually to a default, you would agree with that? A. A non-payment is default.

Q. And it might lead to a default that is not recovered, that is a possibility, isn't it? A. That is a possibility.

Q. Have you witnessed in your many years as a debt collections officer situations where a taxpayer has defaulted and the debt has not been recovered because for instance the taxpayer has become insolvent? A. Yes, I have.

Q. Have you witnessed in those years other instances where a taxpayer has defaulted and a debt has not been recovered because the taxpayer has entered into some form of insolvency administration such as voluntary administration, or winding up? A. That's right, yeah I have.

Q. It is one of the risks that are inherent when you are collecting outstanding tax debts that the taxpayer you are dealing with might well end up in one or other of those situations, isn't that right? A. It is always a possibility." 42 The ATO witnesses were next questioned about the significance of a poor compliance record before the deed of company arrangement. Mr Gregory was questioned about the ATO's receivables management policy. The cross-examination continued:

"Q. And the receivables management policy provides some guidance to taxation officers such as yourself about the approach to take to managing the risks, doesn't it? A. Yes.

Q. One thing the policy does is emphasise the importance of the taxpayer's compliance history, doesn't it? A. Yes.

Q. And in your experience is that an important source of information when you are trying to avoid an insolvency or the default that follows from a winding up to look at the taxpayer client's history? A. Most definitely.

Q. And why do you say most definitely? A. Well, try to gauge a picture of how the company has been going of most recent times and, basically.

Q. The compliance history can tell you a couple of things, can't it, it can disclose what management's attitude to compliance with its taxation obligations is, it might reveal a management approach that considers tax as voluntary, that's one reason for looking at compliance history, isn't it? A. It could disclose that."

43 Mr Gregory also said, however: "A. A company may have had some bad times previously but, and they had financial difficulties at that particular time but not necessarily reveal that is the current situation." 44 Mr Seddon's evidence on this matter was: "Q. And the compliance history of a taxpayer proposing an instalment arrangement is a particularly important piece of information, is that right, for someone who is considering-- A. Yes, it is something you consider, yes.

Q. I take it a taxpayer with a history of significant default in either lodgement or payment obligations is in a more difficult position in terms of persuading the taxation commissioner to accepting an instalment arrangement rather than one who is a cleanskin, if I can use that term. A. Yes.

Q. And that is the history of default reveals a taxpayer in that situation as being a higher risk to the commissioner than one who isn't; is that right? A. Yes, that's right.

Q. But what the tax officer would need to do is look at the extent of the default to make an assessment of just how risky a taxpayer is; is that true? A. They would have to look at everything, all the information they have on hand, and make a considered decision based on that.

Q. And prior substantial default would be one factor? A. Yes." 45 Default in the lodgment of the 2002 and 2003 income tax returns was raised with the ATO witnesses. Mr Seddon gave evidence as follows: "Q. For instance, the existing state of lodgements, that is, whether they are up-to-date with all outstanding lodgements would be another relevant consideration? A. Yes.

Q. Highly relevant, isn't it? A. I wouldn't like to - it's difficult for me to say how relevant something is compared to something else, but it is certainly relevant.

Q. It is relevant, isn't it, because up-to-date lodgements can reveal something about the up-to-date financial position of the taxpayer. Is that right? A. I think it's relevant because if there are outstanding lodgements there are potentially - well, the debt may potentially be different to what it is at the moment.

Q. And in particular might be higher? A. It might be higher, it might be lower.

Q. For instance, annual tax returns would also be relevant in considering an instalment proposal because they would disclose something about the recent trading and financial position of the company. Do you agree with that? A. It would disclose if they were needing to pay tax.

Q. That is, if they were in a loss or a profit situation? A. Yes, that's right." 46 And later: "Q. Since beginning work some eight years ago in the insolvency section, you have had, haven't you, quite substantial experience on behalf of the commissioner in dealing with insolvent clients of the tax office, haven't you? A. Well, clients who are subject to some form of insolvency administration, yes.

Q. In your experience in that capacity is default in taxation lodgements a common characteristic of insolvent companies? A. Yes." 47 The significance of a request for a payment arrangement was canvassed with the ATO witnesses. Mr Stork-Brett gave this evidence: "Q. You had witnessed cases when taxpayers enter an arrangement then some form of insolvency administration befalls it? A. Yes.

Q. Had you ever seen an instance where, I accept it is retrospectively, where such an instalment plan has been agreed with a taxpayer already under an existing DOCA, deed of company arrangement? A. I don't think such a thing ever occurs as far as I am aware." 48 Mr Seddon's testimony was as follows: "Q. Do you have any recollection of any circumstance whilst you were carrying out that work wherein you received and considered an instalment arrangement from an entity which was the subject of an existing insolvency administration? A. No, I don't remember.

Q. Based on your experience, though, would you accept that an instalment arrangement from an entity that is the subject of an existing insolvency administration is in a somewhat different category from the normal situation where a taxpayer, and let's deal with companies, a corporate taxpayer effects some default, is in default and makes an instalment proposal? That is, the added circumstance of the insolvency administration situation is a distinguishing feature? A. It is something you would take into account.

Q. And, indeed, that would be because the presence of that insolvency administration could at least have some bearing upon the prospective instalment arrangement being complied with. Do you agree with that? A. It would be something you would consider as part of their compliance history.

Q. And the compliance history of a taxpayer proposing an instalment arrangement is a particularly important piece of information, is that right, for someone who is considering-- A. Yes, it is something you consider, yes." 49 Mr Gregory accepted that a fresh default in the payment of tax puts at risk future compliance with an existing deed of company arrangement. He also accepted that this "reveals something bad about the on-going trading circumstances of the company". 50 Mr Gregory gave evidence about the failure to pay the March 2004 GST instalment: "Q. So far as in terms of your work as a debt collection officer works the fact that the existing default, that is that there was a default in 2004 with this instalment proposal that constituted an event of default or breach of the deed have some impact on your assessment of risk in terms of the receivables management policy? A. Yes, there would have been a risk in respect of that.

Q. It would have changed your consideration of the taxpayers proposal, wouldn't it? A. Depending further investigation and discussion with the administrator.

Q. It at least raises the spectre that the problem that had precipitated the need for the instalment arrangement might turn out to be more significant than you had been told, do you agree with that? A. It could." 51 The evidence surveyed at paragraphs [40] to [50] is of limited value. Each officer conceded that the particular matter raised could or might be of relevance in coming to a view about solvency or insolvency. Each emphasised the need to take account of all relevant information. The theoretical capacity of a particular factor, if present, to prompt inquiry or excite suspicion is somewhat beside the point. The real inquiry concerns the actual situation prevailing, having regard to things actually known. 52 The matters of which the Commissioner must be taken to have been aware at each point during the period 22 March 2004 to 23 July 2004 may now be stated. 53 First, there was the fact that Fashion Warehouse had become insolvent in mid-2001, that a deed of company arrangement had been executed in August 2001 and that the ATO - along with other creditors - had suffered a substantial loss in respect of its pre-administration debt. 54 Second, the Commissioner knew that the deed of company arrangement precluded action to recover pre-August 2001 debts while the deed remained operative; and that, upon full effectuation of the deed all those debts would be extinguished. There was nothing to suggest that the deed would not, in due course, be fully effectuated. The reasonable and rational expectation therefore was that pre-August 2001 debts would not represent any form of call on ongoing cash resources and that those debts could therefore be ignored in judging solvency. 55 Third, Fashion Warehouse had, during the post-deed period and up to 22 March 2004, duly and punctually paid all post-deed tax liabilities. 56 Fourth, there was default in the making of payments due to the ATO in April 2004. 57 Fifth, the ATO was approached in early May 2004 - that is, very soon after the default in payment - with a request for a payment arrangement (a request that it in due course granted). The reason given was expressed in one communication as "a short term cash flow problem" and in another that "trading has been slow". 58 Sixth, there had been default in lodgment of tax returns for 2003 and 2004. That was something that, of itself, could not ground a suspicion of insolvency. But it indicated a need to inquire. Mr Gregory made inquiries. He was given a plausible explanation unrelated to indicators of insolvency: see paragraph [33] above. There is no reason why that should not have been taken at face value. 59 The fourth and fifth items, taken together, indicated no more than an inability, at the particular time, to pay the sums due in April 2004, coupled with an explanation related to slow trading and short term cash shortage and a willingness to pay the sums in question over a relatively short period. The sixth item indicated that, while returns were overdue, there was a rational and reasonable explanation for this unrelated to any state of insolvency. The first, second and third items were all consistent with an understanding that solvency was not compromised. The "INSOLVE" or "INSOLVENT" notation that continued on the ATO file from 2001 was quite irrelevant to any present and ongoing belief about the state of the company's solvency. 60 I am of the opinion that none of the items of knowledge or information held by ATO officers was alone sufficient to engender any rational and well based suspicion that a state of present and actual insolvency existed. Nor was the cumulative knowledge of all the matters sufficient. 61 I am satisfied that, when the whole of the knowledge and information held within the ATO is considered, the Commissioner can be seen to have proved that, at the time of each of the several challenged payments to him, he did not have reasonable grounds for suspecting that Fashion Warehouse was insolvent or would become insolvent through the making of those payments. The Commissioner can also be seen to have proved that, at the time of each of the several challenged payments to him, a reasonable person in the Commissioner's circumstances would have had no such grounds for so suspecting. 62 This, taken with the matters referred to at paragraphs [7] and [8] above, means that the Commissioner has succeeded in establishing an entitlement to the immunity or protection given by s 588FG(2), with the result that the court is precluded by that section from making the order under s 588FF that the liquidators seek. 63 The originating process will therefore be dismissed with costs. 64 I have not to this point mentioned that the Commissioner has, by interlocutory process, proceeded under s 588FGA against the person who was, at the time, the director of Fashion Warehouse. Dismissal of the originating process means that the interlocutory process will also be dismissed. **********

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