Deputy Commissioner of Taxation v Gail Freeman & Co Pty Ltd

Federal Court of Australia|2007-07-05|Before: Madgwick J

HIS HONOUR 1 This is an application under s 459P of the Corporations Act 2001 (Cth) ("Corporations Act") for an order under s 459A of that Act that the defendant company be wound up in insolvency. In making the application the plaintiff relies on the defendant's failure to comply with a statutory demand, served in accordance with s 459E of the Corporations Act.

Background 2 By notices of assessment issued on or about 1 June 2005, the defendant company was assessed for superannuation guarantee charges and additional charges for the years ended 30 June 2001 and 30 June 2002. On or about 6 October 2005, notices of assessment of superannuation guarantee charges and additional charges for the year ended 30 June 2003 and the quarters ended 30 September 2003, 31 December 2003, 31 March 2004, 30 June 2004, 30 September 2004, 31 December 2004, 31 March 2005 and 30 June 2005 issued to the defendant. 3 The assessments remained unpaid and, on 11 July 2006, the plaintiff issued a statutory demand in the prescribed form for a debt of $176,146.97, being the sum then due by the defendant to the Commonwealth of Australia. This debt was payable by the company to the plaintiff, and recoverable by the plaintiff under and in pursuance of the provisions of the Taxation Administration Act 1953 (Cth). 4 The plaintiff served the statutory demand by posting it on 11 July 2006 by prepaid post to the registered office of the company in the ACT. The debt remained unpaid and on 31 October 2006, the plaintiff commenced these proceedings by originating application. The originating application complies with the statutory requirements of s 459Q of the Corporations Act. 5 Following the commencement of proceedings, the company supplied further information to the plaintiff. Amended assessments were issued for each period mentioned above, save the 2001 year. On or about 15 March 2007 notices of amended assessment of superannuation guarantee charges and additional charges for the years ended 30 June 2002 and 30 June 2003 and the quarters ended 30 September 2003, 31 December 2003, 31 March 2004, 30 June 2004, 30 September 2004, 31 December 2004, 31 March 2005 and 30 June 2005 issued to the defendant. Between February and May 2007 the company made eight payments of $5,000 each and one payment of $6,200 for the total sum of $46,200.00. The amended assessments and instalment payments reduced the company's liability for superannuation guarantee charges, additional charges and penalties to $81,002.60, which remained outstanding as at 29 May 2007, when the hearing concluded. 6 As at that same date, the company had a running balance account deficit debt in the vicinity of $50,005.56. The total liability owed by the defendant to the plaintiff is $131,008.16. 7 By virtue of s 75 of the Superannuation Guarantee (Administration) Act 1992 (Cth) ("Superannuation Guarantee (Administration) Act"), the production of a notice of assessment is conclusive evidence of the due making of the assessment and that the amounts and particulars of the assessment are correct.

The statutory framework 8 Part 5.4 of the Corporations Act governs winding up in insolvency. Section 459A provides that, on an application such as that which is the subject of these proceedings, "the Court may order that an insolvent company be wound up in insolvency." Section 459C(2)(a) empowers the Court to presume that a company is insolvent if the company has failed to comply with a statutory demand. According to s 459F, a company is taken to have failed to comply with a statutory demand where it has not been complied with within 21 days from the date the demand is served. 9 While a company may apply to the Court to have a statutory demand set aside (s 459G(1)), this must be done within the 21 day time limit described above. 10 Section 459S relevantly states: (1) In so far as an application for the company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground: (a) that the company relied on for the purposes of an application by it for the demand to be set aside; or (b) that the company could have so relied on, but did not so rely on (whether it made such an application or not). (2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent. 11 Under s 465C a notice of grounds of opposition to an application for winding up, and an affidavit verifying the matters in the notice, are to be filed within the time prescribed by the rules, or leave is required to oppose. Leave to file an amended notice of opposition in this matter was granted by Registrar Hedge on 29 March 2007. 12 Finally, the Court has a general discretion under s 467 not to wind up a company "even if a ground has been proved on which the Court may order the company to be wound up".

The defendant's case 13 In summary, the defendant submits that the present proceedings should be dismissed on the bases that:

There was no effective service of the statutory demand
There is "no justiciable issue" before the Court as the amended assessments displaced the initial assessments on which the statutory demand was based.
The defendant is solvent.
There is a genuine dispute about the debt.
Substantial injustice will be caused unless the demand is set aside; and
There are other reasons why the demand should be set aside. 14 With respect to the first ground above it is submitted by the defendant that the statutory demand was not properly served. Ms Gail Freeman, sole director of the defendant, deposed that she did not receive the statutory demand until 2 August 2006, which she believed to be after the date before which an application had to be made to have the demand set aside. 15 During the hearing the defendant pressed mainly the second ground. It was argued that, should this ground not be accepted, then the defendant would, in the alternative, seek leave, pursuant to s 459S of the Corporations Act,to raise grounds it could have raised in an application to set aside the statutory demand. The defendant submits that these proceedings should be struck out because the "initial debts" which underpin the statutory demand and which provided the "raison d'etre" for the current proceedings have been dissipated. Accordingly, there is said to be no longer any "justiciable issue" before the Court. 16 It is not in contention that the statutory demand which underpins the current proceedings relies upon the initial assessments that were issued prior to the current proceedings and which had a legal existence and effect prior to the plaintiff raising amended assessments on or about 15 March 2007. 17 According to the defendant the debt relating to the initial assessment raised for 2001 has been paid. Hence that part of the debt no longer represents any "justiciable" matter and the plaintiff cannot rely on that part of the debt in these proceedings. 18 As to the remaining debts which were the foundation of the statutory demand, the defendant submits that a fresh liability arises with respect to the defendant from the moment the plaintiff effected service of the notices of amended assessment. To support this contention the defendant relies on s 39 of the Superannuation Guarantee (Administration) Act which provides: Amended assessment to be an assessment Except as otherwise expressly provided by this Act, an amended assessment is taken to be an assessment for all the purposes of this Act. 19 The defendant submits that it is manifest from the Superannuation Guarantee (Administration) Act that the legal effect of the issuing of amended assessments is that the initial assessments become void ab initio and the debt raised pursuant to those initial assessments dissipates by operation of law.

Service of the statutory demand 20 The formalities of serving a statutory notice of demand are set out in s 109X of the Corporations Act. Service by post to the registered office shown on the records maintained by the Australian Securities and Investments Commission is effective service under s 109X(1)(a) (see for example FP Leonard Advertising v KD Travel Service Pty Ltd (1993) 11 ACLC 1,203.) 21 Section 29(1) of the Acts Interpretation Act 1901 (Cth) is applicable to the service of statutory demands due to s 5C of the Corporations Act. Section 29(1) deems postal service under s 109X(1)(a) to have been "effected at the time at which the letter would be delivered in the ordinary course of post", after it has been sent in a properly addressed, prepaid and posted letter. As a result, a statutory demand is validly served if posted to the registered office of the company as at the date of posting, even though service is deemed not to be effected until a time after posting, namely when the letter would be delivered in the ordinary course of post. 22 By virtue of s 160 of the Evidence Act 1995 (Cth) the statutory demand in the present case is presumed to have been served on Monday 17 July 2006, being the fourth working day after posting on Tuesday 11 July 2006. The defendant could have applied to set aside the demand in the period ending on Monday 7 August 2006. This was not done. 23 Further, no evidence has been submitted to warrant the presumption provided for in s 160 of the Evidence Act 1995 (Cth) being called into doubt. 24 In my opinion there was proper and effective service of the statutory demand.

"No justiciable issue" 25 As stated above, the defendant relied on what its counsel called a "bifurcated argument". The first part was that the debt which was the basis for the statutory demand does not now "exist at law" (the so-called "no justiciable issue" argument), and the second that the discretion of the Court should be exercised in its favour. 26 The first argument was said to be a stand-alone argument which, it was said, did not require the exercise of discretion under s 459S. It is true that such an argument is not one which the defendant could have relied on in an application to set aside the statutory demand (had one been made) because the amended assessments were issued after the deadline for making such an application. On one view, this may mean that they may not be proscribed by s 459S. Let it be assumed that that is so. Nevertheless, the arguments fail. 27 The defendant was unable to suggest any authority to the effect that, where the Commissioner founds a statutory demand on an assessment and there is a later assessment, the statutory demand is thereby invalidated. The defendant sought to rely on comments of Finkelstein J in NT Resorts Pty Ltd v Deputy Commissioner of Taxation (1998) 153 ALR 359. These do not suggest any support for the propositions argued. His Honour said, at 367: It may be open to argument that where the only debt that is specified in a statutory demand is a debt that is not due and payable then the demand is not a statutory demand at all. It is true that a statutory demand is defined by s 9 to include a demand that purports to be a demand. That is, a demand that professes or claims to be a statutory demand will be a statutory demand for the purposes of the Corporations Law: see Kalamunda [Meat Wholesalers Pty Ltd v Reg Russell & Sons Pty Ltd (1994) 51 FCR 446 at] 452. Nevertheless, there may be a case where a document that professes to be a statutory demand contains such a serious deficiency that it is impossible to treat the document as a statutory demand no matter what it professes to be: Topfelt [Pty Ltd v State Bank of New South Wales Ltd (1993) 47 FCR 226 at] 238; Kalamunda at FCR 452. In this case it is not necessary to decide whether the demand is a statutory demand because it has not been established that the debts were not due and payable when the demand was served. 28 Setting aside the misplaced conception of "justiciability", the fact is that, at the time of service of the statutory demand, there were debts lawfully payable by the defendant to the plaintiff, as alleged in that demand. By independent operation of different statutory provisions there are now lawfully payable debts which the defendant cannot duly pay so as to compel a conclusion of insolvency. At no relevant time has the defendant ever been free of debt to the plaintiff at a level sufficient to enable resort by the plaintiff to the insolvency provisions of the Corporations Act. The statutory demand did not contain "such a serious deficiency that it is impossible to treat the document as a statutory demand" for the same reason as that given by Finkelstein J: it has not been shown that the debts in question "were not due and payable when the demand was served" (emphasis added).

Leave to raise grounds of opposition under s 459S 29 With respect to grounds 4, 5 and 6 above, the defendant requires leave to raise these issues by virtue of s 459S of the Corporations Act. Leave is not to be granted unless the Court is satisfied that the grounds are material to the solvency of the company. The leave which may be granted under s 459S(1) is not leave to apply to set aside the statutory demand, but rather leave to oppose the application on a particular ground. If the ground of opposition is one which the company could have relied upon, but did not, in an application to set aside the demand, leave is required. 30 The scheme of Part 5.4 of the Corporations Act is to enable quick resolution of the issue of solvency and the determination of whether the company should be wound up, without the interposition of disputes about debts unless they are raised promptly (David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 270). The Corporations Act provides that disputes about the existence of debts demanded in a statutory demand are to be resolved through the process of applying to set aside the statutory demand (Chief Commissioner of Stamp Duties v Paliflex Pty Ltd (1999) 17 ACLC 467 at [38]). 31 The exercise of the discretion under s 459S(1) does not lead to the setting aside of the statutory demand, and therefore does not remove the presumption of insolvency which arises under s 459C(2)(a). If the Court grants leave, its task is to deal with the proceedings for winding up, rather than cutting away the demand which is their substratum. The overall question of solvency is the critical issue (see, for example, D.A.G. International Pty Ltd v D.A.G. International Group Pty Ltd [2005] NSWSC 1036 at [5] per Brereton J). 32 In my opinion, the grounds sought to be relied upon by the respondent are those which could have been relied on in application to set aside the statutory demand. As such, for these arguments to be raised the Court must be satisfied that they are material to the present solvency of the defendant company. For the reasons set out in [28] and [35], it has not been demonstrated by the defendant that these grounds are relevant to the solvency of the company. 33 Leave to raise the grounds listed above is refused.

The solvency of the defendant 34 The presumption of insolvency raised by s 459C of the Corporations Act can be rebutted by positive proof of the company's solvency under s 459C(3). The company is required to prove, to the requisite civil standard, that it is able to pay its debts as and when they become due and payable. No leave is required to oppose the winding up on this ground. 35 Prior to the hearing, the defendant put on some evidence of its current assets and liabilities. These figures were contained in the form of a balance sheet and admitted a current deficit of approximately $64,000. After the first day's hearing I adjourned the matter for several weeks to allow the defendant to put on further evidence regarding solvency and in support of its request that I exercise the discretion allowed by s 459S (discussed above). No evidence was submitted with respect to the discretion. A further affidavit sworn by Ms Freeman on 28 May 2007 annexed a "schedule of financial records" to demonstrate solvency. However, these records, rather than demonstrating solvency, confirm that the defendant is unable to meet the debt presently owed to the plaintiff. 36 The evidence which has been adduced on this point is insufficient to rebut the s 459C presumption. I am not satisfied that the company is not insolvent.

General discretion not to order that company be wound up 37 The Court has a discretion under s 467 not to wind up a company "even if a ground has been proved on which the Court may order the company to be wound up". For example, it may, in appropriate circumstances, be better for creditors as a whole to allow the company to trade on rather than have the company wound up. The Court has a duty when considering whether to make a winding up order to have regard not only to the interests of the applicant creditor, but to the interests of all creditors: Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675 at 677. 38 No evidence was put forward regarding the position of unsecured creditors other than the plaintiff. The National Australia Bank is a secured creditor. In the absence of such evidence, it cannot be said that it is against the interest of any creditors that the defendant be wound up in insolvency. 39 There was a plea of hardship as to Ms Freeman's personal position. That the company might be wound up is a sad affair for her and she has had some unfortunate and affecting distractions, not of her making. Nevertheless, over a period of years she has been the controller of the company and has permitted it to slip into its insolvency. There is no proven prospect that that state can tolerably quickly be cured. 40 In any event Ms Freeman is not the company. If people choose to trade through the means of an independent, corporate, legal entity, what may be a hardship or misfortune for them, which a court might be anxious to relieve, is not the hardship or misfortune of the corporate entity. 41 It was also put that a process was underway, albeit belatedly, whereby initial assessments by the plaintiff were being reduced as further information was supplied by the defendant. It is true that the defendant has succeeded in having the initial assessments reduced by providing additional information. There are avenues, namely appeals to the Administrative Appeals Tribunal already in prospect whereby, theoretically, that process might continue. However there is no evidence to suggest that the intended appeals would bear fruit. Moreover the company has had more than ample time to investigate and produce the necessary information. No basis is shown for discretionary refusal of the relief claimed. 42 Nor does the adventitious fact that the assessments that founded the debt justifying the statutory demand have been superseded by other assessments, which in turn support a conclusion of insolvency, justify the Court in intervening on discretionary grounds in favour of the defendant. 43 The application is allowed with costs. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick.

Associate: Dated: 5 July 2007 Counsel for the Plaintiff: Z Rowling

Solicitor for the Plaintiff: Australian Government Solicitor

Dates of Hearing: 24 April and 29 May 2007

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