First Plaintiff v Second Plaintiff

1 The first plaintiff, Dino Calvisi (in his capacity as liquidator of Cyberduck Software Pty Ltd) ('Liquidator') and the second plaintiff, Cyberduck Software Pty Ltd ('Cyberduck'), seek:

(a) a declaration that the transfer of funds in the amount of $271,418.00 made by or on behalf of Cyberduck on or around 2 October 2012 in reduction of the then indebtedness of B.A.S. (R&D) Pty Ltd ('R&D') to the defendant, the Commissioner of Taxation ('Transaction'):

(i) was an uncommercial transaction pursuant to section 588FB of the Corporations Act 2001 (Cth) ('the Act');

(ii) was an insolvent transaction of Cyberduck pursuant to section 588FC of the Act; and

(iii) is void against the Liquidator pursuant to section 588FE(2) of the Act; and

(b) an order pursuant to section 588FF of the Act that the defendant pay to the Liquidator the sum of $271,418.00 together with interest pursuant to statute from 6 October 2014.

2 In the alternative, the first plaintiff (in his capacity as liquidator of R & D) and the third plaintiff, R&D seek:

(i) was an unfair preference pursuant to section 588FA of the Act;

(ii) was an insolvent transaction of R&D pursuant to section 588FC of the Act; and

(iii) is void against the Liquidator pursuant to section 588FE(4) of the Act; and

(b) an order pursuant to section 588FF of the Act that the defendant pay to the Liquidator the sum of $271,418.00 together with interest pursuant to statute from 6 February 2013.

3 On 22 November 2013, Cyberduck was placed into liquidation by way of a creditors' voluntary wind up. By reason of the operation of ss 9 and 513B of the Act, the relation-back day in relation to Cyberduck is 22 November 2013.

4 On 14 December 2012, R&D was placed into liquidation again by way of a creditors' voluntary winding up. By reason of the operation of ss 9 and 513B of the Act, the relation-back day in relation to R&D is 14 December 2012.

5 Stan Traianedes was appointed liquidator of both companies. On 28 October 2016, he resigned as liquidator of both companies and Mr Calvisi was appointed liquidator.

6 As at September 2012, the Commissioner of Taxation ('Commissioner') maintained an integrated client account in respect of Cyberduck and also an integrated client account in respect of R&D. These accounts served to record the amounts payable from time to time as between the Australian Taxation Office ('ATO') and Cyberduck and the ATO and R&D. The accounts also recorded transactions between the ATO and Cyberduck and transactions between the ATO and R&D.

7 On 25 September 2012, Cyberduck was entitled to receive from the ATO a GST refund of $271,418.00. The refund was due because on 20 August 2012, Cyberduck lodged Business Activity Statements for the periods 1 July 2011 to 30 June 2012 claiming input tax credits in respect of goods or services purportedly acquired from Big Ant Studios Melbourne Pty Ltd ('Cyberduck Credit').

8 On 25 September 2012, R&D owed the ATO tax liabilities in the sum of $578,829.00. On that day, Learne Elizabeth Brown, auditor with the ATO, sent an email to Cyberduck's accountant, Mr Frank Colautti, which stated:

To allow the ATO to transfer the funds totalling $271,418.00 from Cyberduck Software Pty Ltd ABN: 76075497415 to B.A.S (R&D) Pty Ltd ABN: 99060882224 which has currently outstanding arrears of $578,829.00 will require you to submit your authorisation in writing. Could you please email your authorisation and I will endeavour to make the necessary arrangements.

9 On 26 September 2012, Mr Colautti wrote to the ATO addressed to the attention of Learne Brown as follows:

As the tax agent for Big Ant Studios Melbourne Pty Ltd, I have been authorise [sic] to allow the Australian Taxation office to transfer any amounts required from its integrated account to pay off any outstanding amounts in the Integrated Loan Balance of B.A.S (R&D) Pty Ltd.

The amount transferable will be the balance after the transfer of $271,417.94 by Cyberduck Software Pty Ltd (TFN 42171935) to B.A.S (R&D) Pty Ltd. to the Australian Taxation Office with the account number 99060882224.

We are still having difficulties lodging the PAYG instalments however this should be resolved in the next few days.

We were also contacted by Mr Joel Thomas of your collections section and he has been advised of the payment plan.

We also acknowledge, that as soon as the refund amount for Big Ant Studios Pty Ltd BAS is received this amount will be paid directly into B.A.S (R&D) Pty Ltd. Integrated account 99060882224.

We will need to ensure that we coordinate this transaction to avoid under or overpayment.

10 On 2 October 2012, the refund of the Cyberduck Credit was allocated against the tax liabilities of R&D and R&D's tax liabilities were reduced by an amount of $271,418.

11 On 29 November 2013, Mr Traianedes, the former liquidator notified the ATO that Cyberduck had not paid the invoices issued by Big Ant Melbourne Pty Ltd that gave rise to the input tax credits on which the Cyberduck Credit was founded.

12 On 17 June 2015, Mr Traianedes was informed by ATO that an audit had been commenced in relation to Cyberduck for the period 1 July 2001 to 30 September 2013 and was provided with an audit paper and asked if he disagreed with the ATO's position as outlined in the audit paper.

13 On 19 June 2015, the ATO wrote to Mr Traianedes notifying him that it was the Commissioner's present intention to reverse the input tax credits on which the Cyberduck Credit was founded.

14 On 29 June 2015, Mr Traianedes was advised on the outcome of the ATO's audit of Cyberduck and informed that Cyberduck's Business Activity Statements for the period 1 October 2011 to 30 September 2012 had been revised. He was also served with a notice of amended assessment of net amount totalling $281,183.00 for the period 1 July 2002 to 30 June 2013 and a notice of assessment of net amount totalling $75,548.00 for the period 1 October 2011 to 30 June 2012 in respect of Cyberduck.

15 Mr Traianedes made demands to the ATO for payment of the sum of $271,418.00 both in his capacity as liquidator of Cyberduck and in his capacity as liquidator for R&D on the basis of claims that the Cyberduck Credit was a voidable transaction under the Act. The defendant has not paid the demanded sum.

16 At the hearing of the proceeding on 12 and 14 September 2017, the Liquidator and Cyberduck and, the Liquidator and R&D were given leave to be represented by separate counsel.

17 The Liquidator and Cyberduck submit that the transfer of the credit from Cyberduck's account to R&D's ATO account is an uncommercial transaction entered into by Cyberduck and voidable pursuant to s 588FE of the Act ('Uncommercial Transaction Claim').

18 The Liquidator and R&D submit that the application of the refund due from ATO to Cyberduck against R&D's indebtedness to the ATO is an unfair preference in accordance with the meaning of s 588FA of the Act and the transaction is voidable in accordance with s 588FE of the Act ('Unfair Preference Claim').

19 The defendant submits that there are six primary reasons why the claims made by the plaintiffs must fail:

(a) in relation to both the Uncommercial Transaction and the Unfair Preference Claim, the first plaintiff has mischaracterised the relevant 'transaction' - when the 'transaction' is properly characterised and defined, there can be no uncommercial transaction or unfair preference;

(b) in relation to both the Uncommercial Transaction Claim and the Unfair Preference Claim, the first plaintiff has failed to establish that the relevant company was insolvent at the date of the allocation of the Cyberduck Credit;

(c) in relation to the Unfair Preference Claim, the first plaintiff is unable to establish that the Commissioner received from R&D more than the Commissioner would receive from R&D in respect of the relevant debt in a winding up of R&D as required by s 588FA(1)(b) of the Act;

(d) in relation to the Unfair Preference Claim, the Commissioner has established that the defence provided by s 588FG(2) of the Act is available (good faith defence);

(e) in relation to the Uncommercial Transaction Claim, the uncommerciality requirements of s 588FB are not met; and

(f) in relation to both the Uncommercial Transaction Claim and the Unfair Preference Claim, even if the Commissioner was wrong about all of the above matters, the Court should decline to make any orders under s 588FF of the Act in the circumstances of this case.

20 The defendant submits that the fundamental threshold question that is raised in this proceeding is what is the relevant transaction and that the Liquidator has mischaracterised the transaction.

21 In Kalls Enterprises Pty Ltd (In Liquidation) v Baloglow,[1] Giles JA said:

For an order pursuant to s 588FF there must be a "transaction of the company" of a particular kind. The identification of the transaction governs whether it was an uncommercial transaction, since entry into "the transaction" (s 588FB(1)) must be considered. It may govern whether it was an insolvent transaction, for example through consideration of whether the company became insolvent because of entering into "the transaction" (s 588FC(b)(i)). And it is material to the orders which may be made under s 588FF, not only because orders about payment of money are tied to what was paid under or received because of "the transaction" (s 588FF(1)(a), (b)) but also because, for example, an agreement constituting, forming part of or relating to "the transaction" can be declared void (s 588FF(1)(b)). The limitations in s 588FG are also tied in various ways to "the transaction". The identification of the transaction is fundamental, and the transaction must be a transaction "of the company".

22 The Liquidator and Cyberduck also submit that the relevant transaction must be identified before a finding can be made that there is an uncommercial transaction. They say that the transaction that took place was the allocation of the refund to Cyberduck of $271,418.00 against the tax liabilities of R&D which had the effect of reducing those liabilities by $271,418.00.

23 Ms Brown, when cross-examined, gave the following evidence regarding the authorisation for that transaction to take place:

So, you send an email to the tax agent basically saying can we get some written authorisation and then we can make this happen. Is that right?---Um, I sent it to allow it. So, to allow it I needed written authorisation.[2]

...

So, your understanding is on 2 October you had the email from Mr Symons, the director, and then you spoke to the relevant person internally and the transfer was made?---So, on 26 September I received - it looks as though I received the email.

Yes?---And then, on 2 October we were able to, um, arrange for that to be done.

Thank you. Now, if the authorisation hadn't been provided and the money hadn't been transferred in this way - I think you answered this question before - but, Cyberduck would have been told to be paid the amount of the credit. That's right?---Yes.

And if that had happened the tax debt of the related company, B.A.S. (R&D), would not have been reduced by the 281,700 and - $271,417.94?---Correct.

And the Tax Office would have pursued that tax payer in the usual way - - - ?---Correct.

- - - for that amount?---Correct.[3]

24 I accept that Ms Brown requested an authorisation and an authorisation was given for the refund to be applied against R&D tax liability. I also note that the Commissioner gave effect to the authorisation when R&D's tax liability was reduced by the application of the Cyberduck Credit.

25 The Liquidator and Cyberduck submit that the transaction necessarily entailed Ms Brown's request for the authorisation and the Commissioner giving effect to the authorisation by transferring the Cyberduck Credit in reduction of R&D's tax liability on 2 October 2012. They say that this approach is consistent with the observations of Austin J in Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd (In Liq),[4] where Austin J said:

The solicitor for the first and second cross-defendants challenged the proposition that the directions to AFG and Lawfund were "transactions" for the purposes of Pt 5.7B, as defined in s 9 of the Corporations Act. But in my opinion the word "transaction", which is defined in s 9 in a non-exclusive way, should be read having regard to the legislative policy underlying the voidable transactions provisions (Wily v Bartercard Ltd [2000] NSWSC 372; (2000) 34 ACSR 186 at [48]), and designates any arrangement between two or more parties which produces legal consequences, including contractual consequences, and even (as I observed in Wily v Bartercard) legal consequences under the law of equitable estoppel. By parity of reasoning, a direction which causes payments to be made to B which otherwise would be made to A is a transaction, at least when acted upon (see also Prentice v St George Bank Ltd [2002] NSWSC 358; (2002) 20 ACLC 923).

26 In support of his interpretation of what constitutes the transaction, the defendant relies on Cussen v Sultan,[5] where Nicholas J said:

The court is obliged to look at the transactions between the parties in a manner which accords with commercial reality. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence, but of looking at the transaction as a whole: VR Dye and Co v Peninsula Hotels Pty Ltd (in liq) [1999] 3 VR 201 ; (1999) 32 ACSR 27 ; [1999] VSCA 60 (VR Dye and Co) per Ormiston JA at [37] . Thus, a transaction may include a payment by the company which has the effect of extinguishing the debt of another ( Emanuel (No 14) Pty Ltd (in liq), Re; Macks v Blacklaw & Shadforth Pty Ltd [1997] FCA 667; (1997) 147 ALR 281 ; 24 ACSR 292 ), or it may consist of a series of events occurring at different points of time which are sufficiently connected together ( Mann v Sangria Pty Ltd (2001) 38 ACSR 307 ; [2001] NSWSC 172 ).

27 The defendant submits in accordance with the principles outlined in Cussen v Sultan, the Liquidator's characterisation of the relevant transaction should be rejected. The defendant says that the characterisation fails to accord with the commercial realities and ignores the totality of the relationship between the parties. The defendant relies on the following circumstances in support of its submission:

- the fact that Cyberduck's entitlement to receive the Cyberduck Credit only arose because of Cyberduck's lodging of Business Activity Statements on 12 August 2012 in relation to invoices purportedly issued by B.A.S Melb Pty Ltd ('Big Ant Melbourne') which were never paid by Cyberduck;

- by reason of the second audit of Cyberduck, notices of assessment were issued to Cyberduck in relation to the period 1 July 2011 to 30 September 2013 so as to give effect to an increasing adjustment equivalent to the total input tax credits that had been previously claimed by Cyberduck; and

- at all relevant times, Cyberduck's right to retain the input tax credits claimed was subject to the operation of other taxation laws. This fact was explained to Mr Colautti at a meeting held on 21 September 2012 as part of the initial audit in respect of the Cyberduck Credit.

28 The Liquidator and Cyberduck submit that the formulation of the transaction advanced by the Commissioner:

- ignores the commercial reality of the parties' dealings;

- includes post-liquidation events, an approach that is unsupported by authority and cannot be reconciled with the objects of Part 5.7B of the Act; and

- would not permit the Court to undertake the task set by s 588FB of the Act which is to assess whether 'it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction'.

29 I note that the Harmer Report's description of the underlying policy of avoidance provisions noted the following:

Insolvency law has long adopted the policy of avoiding transactions by which an insolvent individual or company disposed of property within a relevant period prior to the actual commencement of the formal insolvency in circumstances that are unfair to the general body of unsecured creditors.[6]

30 Not only does the Harmer Report support the Liquidator and Cyberduck's submission but so too does the explanatory memorandum to the legislation that introduced Part 5.7B which states as follows:

The purpose of the provisions in this proposed Division is to ensure that unsecured creditors are not prejudiced by the disposition of assets or the incurring of liabilities by a company in a period shortly before the winding up which would have the effect of favouring certain creditors or other persons and especially related entities.[7]

31 In Demondrille Nominees Pty Ltd v Shirlaw,[8] the Full Court of the Federal Court of Australia had an appeal before it relating to whether a developer of residential units which entered into a contract of sale to sell a unit, entered into an agreement which was an uncommercial transaction pursuant to s 588FB of the Act. Foster, Lindgren and Madgwick JJ said:

The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, "transactions at an under-value" entered into within a specified limited time prior to the commencement of the winding up (see Explanatory Memorandum, par 1014). To construe the expression "uncommercial transaction" to catch the agreement in the way in which we have done promotes the purpose or objects of the provisions to which we have referred.

32 In my view, the transaction does not include a post-liquidation event. The audit and the amended assessments some three years after the application of the Cyberduck Credit to R&D's tax liability does not form part of the transaction. Part 5B of the Act operates to prevent the avoidance of transactions which have taken place prior to liquidation. In my view, the proper characterisation of the transaction is at the time at which it occurred. The Court, when looking at the commercial reality, should not be looking at events taking place some three years after the time when the tax credit was granted and applied to R&D's tax debt.

33 The Liquidator relies on reports that he prepared on 27 January 2017 to prove that Cyberduck and R&D were insolvent at the relevant time.

34 Solvency is defined in s 95A of the Act as follows:

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.

35 The Liquidator relied on Cyberduck's and R&D's limited books and records in his possession in preparing his report. He noted that financial statements did not appear to have been prepared for either Cyberduck or R&D. Their affairs have been solely accounted for in Cyberduck's electronic accounting file ('MYOB File'). He further noted the MYOB File only enabled him to extract reports for both companies from 1 July 2011.

36 The Liquidator and Cyberduck submit that the Liquidator's evidence regarding the insolvency of Cyberduck should be accepted. They say the information extracted from the financial records of Cyberduck and the Liquidator's conclusions are critical. They rely on the Liquidator's findings that:

- Cyberduck's only real asset appeared to be income tax refunds payable by the Commissioner; and

- the income tax refund recorded as owing by the Commissioner in the amount of $1,248,216.00 was not paid by the Commissioner as the Commissioner advised that the company actually owes $290,623.25 as at 2017 following an audit.

37 In Shaw v KPR Recruitment Aust Pty Ltd,[9] Gleeson JA stated that:

It is trite that the liquidator has the onus to prove that the company was insolvent at the relevant time(s): Welcome Homes Real Estate Pty Limited v Ziade Investments Pty Limited [2007] NSWCA 167 at [40], [46(2)] and [70] (Hodgson JA, Spigelman CJ and Santow JA agreeing).

38 Gleeson JA also referred to the following factors that must be taken into account:[10]

- the issue of insolvency as at a date prior to the winding up necessitates an inquiry into what actually happened;

- mere suspicion cannot substitute proof of the fact of insolvency; and

- in order to determine whether a company was solvent it would be relevant for a liquidator to consider the following matters:

- all of the company's debts at that time to determine whether those debts were due and payable;

- all of the assets of the company as at that time to determine whether those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable;

- the company's business at the time in order to determine its expected net cash flow; and

- arrangements between the company and prospective lenders in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which will be repayable at a later period of time.

39 The defendant submits the evidence relied upon by the Liquidator in the current proceeding does not take into account the above considerations and does not provide proof of the fact of insolvency. The defendant submits that by reason of the deficiencies in the Liquidator's evidence, the Court is unable to draw any conclusion about what actually happened with Cyberduck and R&D.

40 The defendant submits that the Liquidator's crossexamination establishes that:

- the only investigations into the affairs of Cyberduck and R&D involved the Liquidator generating reports from the MYOB system[11] and having discussions with Mr Traianedes (the former liquidator);[12]

- the Liquidator has not interviewed or spoken with Mr Symons, the director of Cyberduck and R&D;[13]

- the Liquidator has not met or interviewed Mr Frank Colautti, tax agent for Cyberduck and R&D;[14]

- the Liquidator has not interviewed or spoken to Danielle, the book keeper of Cyberduck and R&D;[15]

- the Liquidator has not spoken to any officers or employees of Cyberduck or R&D;[16]

- the available information that the Liquidator had demonstrated that Mr Symons paid the company's expenses using his personal credit cards and no investigations were made into Mr Symons' financial circumstances;[17]

- the Liquidator did not investigate Mr Symons' credit card records as they are not part of the books and records of the companies;[18]

- details in the insolvency reports were prepared solely using MYOB records and there was no formal process to determine the accuracy of those records;[19]

- the Liquidator did not disagree with Mr Traianedes' view that Cyberduck had never paid the relevant invoices purportedly issued by Big Ant Melbourne (a related company);[20]

- the Liquidator received from Mr Traianedes his electronic work files and two boxes both which had a company folder in them and a couple of additional folders in there, but there was nothing of substance;[21]

- the Liquidator could not recall whether he had reviewed a copy of the purported contract between Cyberduck and Big Ant Melbourne pursuant to which he appeared to suggest that significant amounts were owed by Cyberduck;[22]

- the Liquidator agreed that Cyberduck's only purported liabilities appeared to be of debts owing to Big Ant Melbourne and Mr Symons;[23]

- the Liquidator conducted no investigations into loans owed to Big Ant Melbourne and simply relied on statements made by Mr Traianedes, nor did he sight any document to establish the existence of the loans;[24]

- the Liquidator agreed that if the purported debt to Big Ant Melbourne was taken out of the balance sheets and the insolvency report of Cyberduck, then Cyberduck had a positive asset position;[25]

- the only information to establish amounts purportedly owing to Mr Symons were available at a relevant time when taken from the MYOB file as a company record;[26]

- the insolvency report concerning R&D erroneously included amounts said to be owed to Sage Interactive by R&D;[27]

- the Liquidator accepted that once the Sage Interactive amounts were removed, R&D had a positive asset position;[28] and

- the Liquidator accepted that his analysis had not taken into account the ability of R&D to call upon Mr Symons to pay the company's expenses.[29]

41 The Liquidator and R&D submit that the insolvency report of R&D prepared by the Liquidator addressed a technical or balance sheet insolvency test and based his conclusion on the following:

- R&D had a deficiency of assets over liabilities since at least 31 March 2012;

- the primary assets were cash at bank funds (if any) and equipment and software;

- R&D's bank account was overdrawn since at least July 2012;

- R&D had two trade debtors comprising one debtor who was not disclosed in the Report As To Affairs prepared by the directors and another from a related entity whose debt had been outstanding since July 2011 and was placed in voluntary liquidation in December 2012;

- at the commencement of the liquidation, R&D did not hold any equipment or software;

- the income recorded in R&D's financial records was not reflected in R&D's bank statements;

- the other assets disclosed in the balance sheet were of the nature of clearing accounts for wages; and

- upon appropriate adjustments being made for assets which were not recoverable, R&D's current ratio was negative from at least 30 September 2011.

42 In response to the criticisms made by the defendant in relation to the way in which the Liquidator prepared his reports, the Liquidator and R&D rely on the following evidence given by the Liquidator:

- in forming his opinion as to solvency, the Liquidator reviewed all R&D's available books and records in electronic and hard copy form including MYOB files and the previous liquidator's working files and reports;[30]

- the Liquidator conferred with R&D's previous liquidator;[31]

- the Liquidator made attempts to find Mr Symons including visiting his home address and 'had absolutely no luck' finding him;[32]

- after adjustments had been made for debts and credits that were not recoverable or for which there was no proper evidence, R&D was trading at a loss;[33] and

- the Liquidator did not make any enquiries about Mr Symons' ability to pay R&D's creditors because he believed that if Mr Symons wanted to 'stay the company', he would have put money in.[34]

43 The criticisms made by the defendant of the manner in which the Liquidator conducted his investigation have some merit. I accept that his investigation could have and should have been done better. I note that there were some difficulties for the Liquidator to overcome because he took over the liquidation from a previous liquidator. Even though he could have done better, I accept that his opinion is not a mere assertion. He has done the best he can.

44 As to Cyberduck, I accept that the only real asset appears to be income tax refunds owed by the Commissioner of $1,248,216.00. There are some loan accounts to a related company of approximately $318,000.00. The liabilities are in the range of $4,107,273.00. There is no cash held in the company's bank account. On the balance of probabilities, in my view, this company was insolvent at the relevant time. I rely on the balance sheet, the profit and loss statement and on the evidence of the Liquidator to come to that conclusion.

45 As to R&D, again I have considered the report in detail and the evidence of the Liquidator. There was some confusion regarding which items should be removed from the balance sheet but there appears to be a deficiency of assets over liability. Again, the cash situation is not good. The matters raised in the submissions of R&D, which I accept as accurate, demonstrate that on the balance of probabilities, R&D was insolvent.

46 An uncommercial transaction is defined in s 588FB of the Act as follows:

(1) 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.

(2) A transaction may be an uncommercial transaction of a company because of subsection (1):

(a) whether or not a creditor of the company is a party to the transaction; and

(b) even if the transaction 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.

47 In Capital Finance Australia Ltd v Tolcher,[35] Gordon J stated that:

For a transaction to be voidable on account of being uncommercial:

(1) it must be entered into, or an act must be done giving effect to it, during the relation back period: s 588FE(3)(b). In the present case, ss 588FE(2)(b)(ii) and 588FE(4) were not relevant;

(2) at the time of the transaction or when something was done to give effect to it, LSE must have been insolvent (s 588FC(a)); and

(3) it may be expected that a reasonable person in LSE's circumstances would not have entered into the transaction taking into account the benefits for LSE, the detriment to LSE, the respective benefits to other parties to the transaction and any other relevant matters: s 588FB(1). [36]

48 As to the third requirement raised by her Honour, that relating to what may be expected of a reasonable person, Gordon J summarised the principles to be applied in determining this issue as follows:

In seeking to address the third of the requirements, the principles to be applied may be summarised as follows:

(1) as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial: see also Lewis (as liquidator of Doran Constructions Pty Ltd (in liq) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 at [156] and Tosich Construction Pty Ltd (in liq) v Tosich [1997] FCA 979; (1997) 78 FCR 363 at 366-367;

(2) four criteria are to be considered - the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));

(3) the objective criteria are not considered in some vacuum but by reference to "the company's circumstances" which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: Tosich Construction at 367; and

(4) for a transaction to be "uncommercial" it must result in "the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice" or where "the consideration ... lacks a 'commercial quality'": see Peter Pan Management Pty Ltd v Capital Finance Corp (Aust) Pty Ltd [2001] NSWCA 15; (2001) 19 ACLC 1,392 at [43]; Lewis v Cook [2000] NSWSC 191; (2000) 18 ACLC 490 at [45]- [46] and Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535 at 548 and the Explanatory Memorandum, Corporate Law Reform Bill 1992 at [1044].[37]

49 The defendant submits that the transaction is not an uncommercial transaction because when the transaction is properly characterised it is clear that the Commissioner did not receive or obtain a bargain of such commercial magnitude that it cannot be explained by normal commercial practice. Here, the defendant is relying on the transaction as including post-liquidation events that lead to the conclusion that the Cyberduck Credit was not due. I have determined that the transaction entails only the preliquidation events and it does not take into account that Cyberduck was not really owed a refund.

50 The defendant submits that even if the Court was to accept the plaintiffs' characterisation of the relevant transaction, the evidence indicates that the Liquidator and Cyberduck are unable to satisfy the requirements of s 588FB. The defendant says that the discharge by Cyberduck of the tax liabilities of R&D appear to have resulted in the extinguishment of equivalent liabilities owed by Cyberduck to R&D. The benefit must therefore have been received by Cyberduck and the transaction could not be uncommercial for the purposes of s 588FB of the Act.

51 The defendant relies on a letter dated 3 March 2015 from Debbie Hastings, First Assistant Commissioner, Review and Dispute Resolution, ATO to the former liquidator, Mr Traianedes, which states:

We refer to our letter to you on 9 January 2013, your telephone conversation with the writer on 13 January 2015 and your letter dated 22 January 2015.

We refute your assertion that the Commissioner unlawfully withheld the Company's legal entitlement to the refund. The Commissioner is entitled to investigate taxation affairs of entities where there is reason to believe that full and frank disclosure of taxation liabilities has not been made. Further, given there is evidence to support the finding that the Company was never entitled to the credit, there are clear grounds to distinguish the current circumstances from those as seen in Kassem.

As requested by you, we enclose herewith a copy of a note from Daniella, the bookkeeper.

The Commissioner has made many attempts to obtain relevant information and explanations from you in relation to both of the claims you have made in relation to the credit. However, these requests have not been addressed. Accordingly, we are unable to make payment in settlement of either of your claims at this stage as you have been unable to provide the Commissioner with the necessary materials to satisfy the statutory elements of your claims. You have also not satisfied the Commissioner that you do not have a conflict of interest by reason of your decision to pursue both the claims, a decision which cannot be in the best interests of each of the two (different) groups of unsecured creditors.

If you are not satisfied with our decision, and in order to avoid further costly exchanges of correspondence, we invite you to meet with us and the Commissioner's legal counsel to discuss your claims. Should you wish to set up a time to hold such a meeting, please email Ms Chamaree Pervaiz of our office at Chamaree.Pervaiz@ato.gov.au with suitable times and dates.

52 The note referred to made by the bookkeeper states:

As Cyberduck does not employ staff directly and to avoid confusion when looking at the account, certain costs associated with employment such as Staff Fringe Benefits and Staff Amenities costs were offset against the invoice rendered to B.A.S (R&D), thereby reducing the income and not showing the expense as this was considered to be a reimbursement. This method was only applied to B.A.S (R&D) invoices from Cyberduck.

The net effect is that G.S.T paid by Cyberduck to vendors listed in the above schedule were claimed as G.S.T Paid in the BAS return.

Equally G.S.T was charged to B.A.S (R&D) and this amount was claimed as a G.S.T Collected in its BAS return.

In effect G.S.T was passed through and declared correctly in both structures.

53 That note does not explain to me, nor does it lead me to conclude that Cyberduck has obtained a benefit. I note that the Liquidator in his witness statement asserts that from his review of the books and records of Cyberduck and R&D, he did not identify any benefits received by Cyberduck as a result of the transaction, or any prospect of a benefit which may have been likely received from the transaction. There is nothing before me which leads to a conclusion that Cyberduck did receive a benefit. I accept the Liquidator's submissions that that transaction benefitted the defendant, securing part-payment of an amount owed by R&D.

54 Ms Brown, when crossexamined, gave the following evidence:

Now, if the authorisation hadn't been provided and the money hadn't been transferred in this way - I think you answered this question before - but, Cyberduck would have been told to be paid the amount of the credit. That's right?---Yes.

And if that had happened the tax debt of the related company, B.A.S. (R & D), would not have been reduced by the 281,700 and - $271,417.94?---Correct.

And the Tax Office would have pursued that tax payer in the usual way - - - ?---Correct.

- - - for that amount?---Correct.[38]

55 On that evidence, it is clear that the amount of $271,418 would have been paid to Cyberduck and R&D's indebtedness would not have been reduced by that amount. The defendant would have pursued R&D for recovery of the amount owing in the 'usual way'. Clearly, here there has been a material benefit to the defendant and no benefit to Cyberduck.

56 I also note the comments by the bookkeeper, Daniella, were put to the Liquidator who gave the following evidence:

My instructions are that they are comments made by an ATO officer in response to questions asked by Daniella about this particular spreadsheet. And I just point it out. I think it's consistent with your evidence. I think what Daniella says there is that, essentially, Cyberduck doesn't employ any staff, therefore, Cyberduck owes some money to R & D for employment expenses. And the way that that was dealt with internally was a way of offsetting. There was money going both ways. Cyberduck owed B.A.S. (R & D) some money for employees, and B.A.S. (R & D) owed Cyberduck money for unknown other things. And the way that Daniella dealt with it was to offset the employee costs?---There's no evidence of that at all.

So, you dispute what?---There's no evidence in the (indistinct) file of what you're saying. None whatsoever.

So, you're disputing what the bookkeeper is reported to have said there as reflecting practice?---Yeah.[39]

57 The Liquidator and Cyberduck submit that the payment by one company of another entity's tax liability is prima facie an uncommercial transaction of the company that effected the payment. It relies on Gibbons v Deputy Commissioner of Taxation,[40] D'Aloia v Federal Commissioner of Taxation,[41] and Duncan v Commissioner of Taxation: Re Trader Systems International Pty Ltd (in liq).[42]

58 In Gibbons v Deputy Commissioner of Taxation, Nicholas J said:

No evidence established an explanation for the payments consistent with normal commercial practice. Put simply, Deemah incurred a detriment to the extent of $330,355.62 for the benefit of the companies with the result that its assets were depleted to the ultimate detriment of its unsecured creditors.

Looked at from Deemah's point of view, in my opinion there was no justification for the payments and a reasonable person in Deemah's circumstances would not have made them. Accordingly, I find that the payments were uncommercial transactions within the meaning s 588FB(1).[43]

59 In D'Aloia v Federal Commissioner of Taxation, Merkel J said:

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 $3775 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.[44]

60 In Duncan v Commissioner of Taxation, Young J said:

In my opinion, the payments in question were uncommercial transactions. They conferred no benefit on TSIA. Indeed, the payments conferred only detriments on TSIA in that they had the effect of increasing the outstanding liabilities of TSI to TSIA in circumstances where there was no prospect that TSI would be able to repay the advances.[45]

61 Here, in my view, the transaction is clearly an uncommercial transaction. I do not accept that the evidence demonstrates the discharge of Cyberduck of the tax liabilities of R&D resulted in the extinguishment of equivalent liabilities owed by Cyberduck to R&D. The transaction was of no benefit to Cyberduck.

62 The Commissioner submits that there has been no unfair preference because the Commissioner received nothing from R&D.

63 The Commissioner relies on analysis conducted by Brereton J in Re Evolvebuilt[46] to establish that there can be no unfair preference because the Commissioner received nothing from R&D. Brereton J said:

Although it may well be that the payments by Built had the effect of discharging Evolvebuilt's indebtedness - either because Evolvebuilt assented to them, or because the liquidators subsequently did so - it does not follow that they were made by or received from Evolvebuilt. The payments were made out of Built's assets, and not out of any asset to the benefit of which Evolvebuilt was otherwise entitled. Thus they were made by, and received by the defendants from, Built and not Evolvebuilt. This is so, even if making the payment gave Built some right to restitution against Evolvebuilt. If it were otherwise, then the satisfaction of a creditor's debt by the debtor's guarantor would constitute a payment on behalf of the debtor and be liable to be avoided as a preference. To set aside those payments and order their "repayment" to the company which had never been entitled to them would confer on the company and the general body of unsecured creditors a windfall which they would not have received had Built not chosen - unconstrained by any legal obligation to do so - to make them. This feature was not present in any of the cases on which the liquidators rely. In this case it cannot be said in any sensible way that those were received from, or made by, Evolvebuilt. They therefore do not fall within s 588FA(1), or s 588FF(1)(a).[47]

64 A different approach was applied in Burness v Supaproducts Pty Ltd.[48] In that case, the defendant sold and hired building products to a company known as Denward Lane Pty Ltd for some years. Denward Lane Pty Ltd was put into liquidation and a liquidator sought to recover certain payments made to Supaproducts Pty Ltd, not by Denward Lane Pty Ltd but by a related company, Pre Cast Panels Pty Ltd. Gordon J held that the payment which was made on behalf of the debtor to a creditor by a third party was a preference. All that was required to be a finding that a preference existed was that the third party was authorised by the debtor company which was in liquidation. Her Honour said:

In the present case, the payment made by Pre Cast Panels on 10 June 2005 was a "course of dealing initiated by a debtor that [was] intended to, and [did], extinguish a creditor's debt" as contemplated by the Full Court in Re Emanuel. It was the evidence of Mr Messina that Mr Smith contacted the defendant in June 2005 and stated to Mr Messina that "he would be continuing the same business, but had set up a new company ... [t]he new company was [Pre Cast Panels] ... [and that] when the business took over, [the defendant] should transfer the balance of the account to [Pre Cast Panels]". On any view, it was a course of conduct initiated by Denward Lane to discharge its debt to the Defendant through payments made by a third party - Pre Cast Panels. Mr Smith was a director of both companies (and the sole director of Pre Cast Panels), he notified Mr Messina of the upcoming transfer of the account and Pre Cast Panels subsequently assumed the burden of that account. However, even if this payment was not a "course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt" (and I find that it is), then by its conduct, Denward Lane acquiesced in the payment of its debt by the third party (Pre Cast Panels) on its behalf so that the debt is taken to be discharged (see Owen v Tate [1974] 1 QB 402 at 411 - 412 and Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 at [82]), possibly giving rise to a (restitutionary) right in Pre Cast Panels in the form of a claim against Denward Lane for money paid: see Lumbers [2008] HCA 27; (2008) 232 CLR 635 at [43], [47] - [54] and [77] - [80].

However, that is not the end of the inquiry. All that has been established is that a debt owed by Denward Lane has been discharged and that the circumstances of that payment were sufficient to give rise to a finding that a payment was made to the defendant under s 588FA(1)(a). It is still necessary to demonstrate that the payment was preferential. Relevantly, s 588FA(1)(b) provides that a payment will be preferential where the transaction results in the creditor receiving more than they would if they had to prove for their debt in a winding up of the company.

Counsel for the defendant submitted that the preferential element of s 588FA was not satisfied by the liquidator. The basis for this submission was that "unless you have some diminution by the debtor, or of the debtor's assets, you [do not] have a preferential effect". There was no evidence of what, if any, consideration, was provided to Pre Cast Panels by Denward Lane in exchange for its payment of Denward Lane's debt: see [26] above. In the end, whether Pre Cast Panels received consideration from Denward Lane, or even had that "restitutionary" right against Denward Lane, may be put to one side. The Report and Analysis of Insolvency prepared by the liquidator demonstrated that in the winding up of Denward Lane the return to unsecured creditors (which totalled in excess of $2.2 million) was nil or close to nil. In those circumstances, the defendant would have received less than $39,241.70 if it had had to prove its debt in the winding up of Denward Lane. The payment was therefore preferential.[49]

65 The Liquidator and R&D rely on that passage in support of their claim. Here, Mr Symons was director of both Cyberduck and R&D. He clearly acquiesced that the Cyberduck Credit be applied to the reduction of the tax liability of R&D.

66 In Federal Commissioner of Taxation v Kassem and Secatore,[50] the Full Court of the Federal Court referred to Burness. Jacobson, Siopis and Murphy JJ stated:

There is nothing in s 588FA(1) which expressly incorporates as a requirement for an unfair preference that the transaction must result in the diminution of the debtor's assets. Gordon J appears to have rejected a submission that there is such a requirement: Burness at [49].[51]

67 The ATO has received a preferential payment from R&D. If the money paid to the ATO was ordered to be refunded then there would be a dividend to creditors. The ATO, by applying the Cyberduck Credit to R&D's tax debt, has received more than it would in a natural winding up.

68 In my opinion, the application of the refund to a reduction of the tax of R&D is clearly a preference. The Liquidator gave evidence that recovery of the payment as an unfair preference would enable a dividend to the prior creditors comprising superannuation liabilities of $187,899 and employee entitlements of $865,617. If the transaction amount was recovered in this proceeding, then subject to costs it would be substantially insufficient to discharge these priority claims and so a dividend would not then be paid to other non-priority unsecured creditors. That would include the defendant.

69 The defendant submits that he has a good faith defence available to him under s 588FG of the Act in response to the Unfair Preference Claim. That defence is found in s 588FG(2)(b) of the Act which provides:

(2) 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 directorrelated transaction of the company, and it is proved that:

...

(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

70 Pursuant to s 588FG(2)(b), the defendant must establish that there was no reasonable grounds for suspecting R&D was insolvent and that a reasonable person in the defendant's circumstances would not have had such grounds for so suspecting.

71 In Tamaya Resources Ltd v Claymore Capital Pty Ltd,[52] Farrell J considered the requirements to demonstrate the existence of reasonable grounds for suspicion. His Honour said:

It follows, then, that the existence of reasonable grounds for suspicion should be determined by reference to commercial reality derived from the particular industry as applied to the facts at the time of the transaction without using hindsight. There is no single factor whose presence invariably establishes that there was, or should have been, reasonable grounds for suspicion. It is necessary to identify the factors pointing towards insolvency of the debtor and which of those factors were apparent to the creditor and their cumulative impact. There may be countervailing factors and circumstances to be weighed in the balance which could tend to dispel suspicion at the time an impugned payment is made: see Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd (2001) 37 ACSR 477; [2001] NSWSC 230 ("Sutherland v Eurolinx") at [43]-[47] per Santow J.[53]

72 The defendant submits that the evidence demonstrates that:

- Ms Brown's awareness of the financial position of R&D at or about the time of the allocation of the Cyberduck Credit was limited to her knowledge that it had an outstanding tax debt of $578,829. (Ms Brown, in her statement said she was aware that the associated entities of Cyberduck had outstanding BAS and income tax return lodgement issues, including R&D which had an outstanding tax liability of $578.829.[54] She does not say that her knowledge was limited to that fact but it may be inferred.)

- At the meeting held on 21 September 2012, the only documents provided were those of Cyberduck. No documents were provided in relation to R&D.[55]

- At the meeting of 21 September 2012, Mr Colautti stated that the debt owed by R&D would be paid by 12 November 2012 because it was expecting an R&D tax refund from the ATO and would clear the tax debt with those funds.[56]

- Mr Symons informed a debt officer of the ATO on 26 September 2012 that R&D's tax liabilities would be paid from credits to which it was entitled.[57]

- Given that the debt officer was told by Mr Symons that the tax liabilities of R&D would be shortly paid in full, it was unnecessary for the debt officer to ask any detailed financial questions of the taxpayer.[58]

- At the time that Mr Symons provided these assurances to the ATO, R&D had not defaulted on the previous payment arrangements entered into with the ATO.[59]

- R&D did not default on its repayment obligations to the ATO until after the allocation of the Cyberduck Credit.

73 The defendant knew about the financial position of R&D as at 2 October 2012. Having been given seemingly creditable explanations by Mr Symons and Mr Colautti in relation to the reasons why R&D had not previously met its taxation obligations but then given assurances that it would meet those obligations going forward, the defendant submits that he had no reasonable grounds for suspicion. In those circumstances, the defendant says that a s 588FG(2) defence applies.

74 The defendant relies on the evidence of Aris Zafiriou in support of this defence. Mr Zafiriou is employed by the ATO as a director of the ATO's Significant Debt Management Area. He has been employed by the ATO in various positions of the Debt area for over 37 years. He was not cross-examined but provided a witness statement.

- that the defendant maintains computer records in respect of each entity having a tax file number.;

- the ATO has an electronic records system called ATO's Siebel Client Relationship Management System which stores correspondence and records interactions with taxpayers; and

- he reviewed a note in that system made on 26 September 2012 in relation to R&D by Joel Thomas who was employed as a debt officer by the ATO at the relevant time. His role included negotiating payment arrangements for taxation debts between the taxpayer and the ATO.

- the debt officer asked Mr Symons for payment in full and that Mr Symons stated there would be available funds of $271,417.94 from an associated entity to make a payment toward the debt by 5 October 2012. Mr Symons advised that the remainder of the debt would be paid from the account of an associated company, and the note refers to it as 'Big Ant Studio';

- the debt officer was advised that approximately $1.3m in credits would be released to Big Ant Studio on approximately 4 October 2012 and the balance of R&D's Client Activity Centre debt would be paid from this credit;

- in the above phone call, Mr Symons advised the tax debt had accrued due to BAS not being lodged or paid, but the outstanding BAS were now being lodged and paid. The debt officer advised Mr Symons regarding R&D's outstanding lodgements and other ongoing tax obligation, and the note also records that not all financial questions were asked of Mr Symons. By 'financial questions', the notes are referring to the questions contained in the ATO's internal guidelines at the relevant time to help debt officers determine whether a payment arrangement was sustainable. For example, why the taxpayer was having difficulties meeting its tax obligation;

- not all financial questions were asked of Mr Symons as Mr Symons proposed a payment arrangement of two amounts in a short time which effectively amounted to a full payment of the debt. Mr Zafiriou states that in circumstances where a debt officer is told by a taxpayer that the relevant tax liability will be shortly paid in full, it is unnecessary for the debt officer to ask detailed financial questions of the taxpayer;

- the debt officer was not aware of any previous payment arrangements that had been defaulted on;

- the debt officer agreed to a standard payment arrangement by R&D for payment of the debt of $604,203.45 involving two monthly payments, commencing 5 October 2012 and ending 5 November 2012 in the amount of $271,417.94 and $337,403.21; and

- the debt officer found that R&D was willing to cooperate and pay the tax debt in a timely manner of two instalments prior to 5 November 2012 which would be paid well before the agreed date. Chris Webber was the supervisor/coach of Joel Thomas at that time. Based on Mr Webber's conversation with the actioning officer, Joel Thomas, the payment that Mr Thomas agreed to and Mr Symons regarded as sustainable was approved.

77 Mr Zafiriou expresses the opinion that because Mr Symons indicated that a full payment would be made within a short timeframe, including a large upfront payment of $271,417.94 due by 5 October 2012, there was no reason for the ATO to ask detailed questions regarding the financial statements of the company. If the debt officer had any concerns about the ability of R&D to pay the debt within the agreed time frame, ATO policy would have required the debt officer to reject R&D's payment proposal and not enter into a payment arrangement.

78 Ms Brown also provided a witness statement and was crossexamined in relation to that statement. She states that:

- she was currently employed by the ATO as an auditor;

- on 29 August 2012 she was tasked to undertake an audit and enforcement case on Cyberduck;

- on 21 September 2012, she attended a meeting at the premises of Big Ant Studio Melbourne Pty Ltd. Also present at that meeting was Geoff Causon, a senior ATO auditor who accompanied her to the meeting, Ross Symons and Mr Colautti.

- at some time during the meeting, there were discussions relating to the tax debt of R&D which she understood to be $578,829 at that time. Either she or Mr Causon suggested that Cyberduck was entitled to the GST credit that could apply to R&D's tax debt to reduce the tax debt. It was suggested that it might be possible for the ATO to transfer the tax credit to R&D if Cyberduck provided authorisation. Mr Colautti stated during the course of the meeting that the R&D debt would be paid by 12 November 2012 because it was expecting an R&D tax refund from the ATO and would clear the tax debt with those funds. Ms Brown and Mr Causon did not request any further financial documents in relation to R&D or raise detailed questions regarding the nature of the tax debt or how R&D proposed to pay the debt as this was not the focus of the audit.

79 The defendant submits that at no time prior to the completion of her audit into Cyberduck did Ms Brown have any reason to suspect that R&D may potentially be insolvent. Her role as auditor was focussed on determining Cyberduck's eligibility for GST credit, as well as raising broader tax compliance issues regarding the associated entities of Cyberduck. It was not her role to examine the financial documents in detail for purposes unrelated to the audit itself. In light of the assurances that were given by Mr Colautti at the 21 September 2012 meeting, Ms Brown had no reason to suspect or raise questions regarding whether R&D may or may not be solvent.

80 The Liquidator and R&D submit that the defendant knew or expected that R&D might be insolvent, as was demonstrated by the following factors:

- R&D failed to file BAS and PAYG withholding returns since it commenced trading.

- Ms Brown, in the notes of the meeting 21 September 2012 with Mr Causon, Mr Symons and Mr Colautti, stated that the main issue identified during the meeting was that the associated entities of Big Ant Studios were trading with each other and either not lodging BAS or there were outstanding arrears on the accounts and payments are not being made. The notes also state that Danielle, the bookkeeper, advised she was unable to register the PAYG, therefore was unable to report PAYG.

- R&D had a liability exceeding $500,000 when it entered into its payment arrangement with the ATO and such liability almost doubled to $1,059,417 in the week prior to the application for the Cyberduck Credit to the R&D integrated account.

- Ms Brown in her witness statement states that R&D had an outstanding tax debt of $578,829.[60] In the integrated client account running balance account of R&D as at 29 September 2012, the liability is $1,059,417.70.

- R&D had never made any payment against its integrated client account.

- The integrated client account running balance account for R&D for the period 1 January 2007 to 26 November 2012 shows that only one credit applied against the account and that was the credit of the refund of $271,418.

- R&D's debt was sufficiently high so as to generate a call in ATO's automated client management system to ask for payment in full.

- Mr Zafiriou, in his witness statement, states that having reviewed the ATO's Siebel Client Relationship Management System on 25 September 2012, the outbound call to Mr Symons had been automatically generated by Siebel and allocated to Joel Thomas as a debt officer. The outbound call would have been automatically generated by Siebel due to the size of R&D's outstanding Client Activity Centre debt.

- The ATO knew that R&D had a substantial outstanding balance.

- Ms Brown, in her witness statement states that [about 5 September 2012] she was aware that R&D had an outstanding tax expense of $578,829.[61]

- The ATO knew that R&D could not pay that balance out of its own funds.

- When cross-examined, Ms Brown gave the following evidence that R&D could not pay the balance out of their own funds.

So you knew that it was not only Cyberduck, Cyberduck's funds who needed to be used to pay B.A.S (R & D)'s outstanding liability but there was at least one other company being used, company's funds being used?---This, um, you need - a director needs to actually authorise for a transfer to take place, not a tax agent.

Absolutely but you knew that B.A.S. (R & D) couldn't pay this out of its own funds?---Yeah. [62]

- The ATO was concerned to ensure that R&D's tax liability was met within what Ms Brown called the economic group of which Cyberduck and R&D formed part.

- When crossexamined, Ms Brown gave the following evidence:

Yes?---And we assist the client the best way we can. And we look at obviously their associated entities and we look at - in this case we looked at their debts and their lodgement. They had poor compliance history as an economic group and we were there to help them. So that was my role.

Yes. So you were there to make suggestions about - not just confined to the particular tax payer that was being audited but you made suggestions about other companies in the group?---Not - not suggestions. We were there to provide support and to assist them to address their poor compliance and assist them with their lodgement and also their payment arrangements. It's a whole of client approach that we take, the ATO, it's - we're out in the field and we're there to look after the client the best way we can.[63]

- The ATO was looking at any option that would ensure the satisfaction of R&D's outstanding debt.

- When crossexamined, Ms Brown gave the following evidence:

So do you accept that it was when you found out that the only money available to pay B.A.S (R & D)'s outstanding liability was the (R & D) credits that you put forward the option of the Cyberduck credit?---I'd say no because we would have been looking at it any sort of option in relation to how they were going to pay. That would - Frank Colautti advised us that they were expecting that money to come through at that point in time. So I'd say no. That is one option for them to pay their - the money that was coming through in November, that was one option. There may have been others.[64]

- The ATO knew at least three entities within the group were advancing refunds owed to them by the ATO to pay R&D's tax liability.

- Ms Brown, in her notes of the meeting of 21 September 2012 has referred to members within the group advancing refunds owed by them to the ATO.

- The ATO received information about the financial health and cash flow of the group of companies that R&D was looking to for the financing of its outstanding debt, and had the power to ask questions, but elected not to consider the information or ask questions, despite a clear policy to assist its taxpayer clients to facilitate the payment of tax across the economic group, seeing this information as a sideline to a more primary concern, being Cyberduck's entitlement to the Cyberduck Credit.

- In the email dated 26 September 2012 from Mr Colautti to Ms Brown, copied to Mr Symons, Ms Brown was informed that:

- R&D provide operational staff and equipment;

- R&D provide operation staff and equipment use and R&D development for special purpose companies;

- in relation to a request for a time frame in which payments would be received from contracts that there had been an underestimation of time taken for research and development tasks undertaken and also a failure of some of those tasks to bear fruitful results;

- some of the riskier tasks of R&D had failed;

- the Defence Force, one of the group's largest customers, had put a hold status on spending to balance the Federal budget, meaning less than expected revenue; and

- Mr Symons believed revenues would increase once the Federal Government released the hold on Defence spending, but could not estimate the time frame of that future event with any accuracy.

- Ms Brown also gave evidence that:

So, at that point, you knew that B.A.S. (R & D) was only going to get its funding from other companies within the group to pay its tax liability, but five days later you had some more information about the timing of those payments and there was certainly no certainty as to when the income was going to flow through the group?---I wasn't there. The audit - I was there to look at Cyberduck. B.A.S. (R & D) - I was not looking at B.A.S. (R & D)'s financials, anything in relation to B.A.S. (R & D). I was there to be looking at Cyberduck income and expenditure. They were the two things that I was there on the audit to do. So, in relation to B.A.S. (R & D) and all these sideline information that comes through, I did not have an audit case. There was - so, I cannot actually go and dig and look into this. This is, um, Mr Symon's providing us with this information. We were looking at the group, we were trying to ascertain that Cyberduck - where was it extracting its income? How was it evolving? ...[65]

And the reason the client needed help was because B.A.S (R & D) couldn't pay its debt by itself?---I don't know about B.A.S (R & D). I can't give you any answers about it because I didn't look into B.A.S (R & D), I looked at Cyberduck.

And you saw that as outside the scope of you - - - ?---That's outside the scope, we were there to provide that whole of client experience in that one interaction.[66]

- The ATO, through Ms Brown, negotiated with Cyberduck for the application of the Cyberduck Credit to the R&D debt, a step which was outside the normal course of ATO practice to simply pay the refund to Cyberduck.

- On 28 September 2012, Ms Brown sent an email to Chris Webber of ATO's Debt Division which states that:

As part of the audit there is a stopper to withhold the amount of $271,417.94 which will be released. I have negotiated with the tax payer/director for the ATO to transfer the credit to associated entity B.A.S. (R&D) Pty Ltd ABN 9906088224 current outstanding debt.

- The ATO was determined to release the Cyberduck Credit on the basis that it was applied to the outstanding R&D liability.

- Crossexamined, Ms Brown gave the following evidence:

And you say that - you've said to McAloon that's not a decision I make, I take it back to my team and my team supervisor, I give them the results of the audit and a decision is made. There wouldn't have been a decision to release the refund unless it was going to be applied to pay B.A.S. (R & D) would there?---No. No we would be releasing the refund. We were releasing the refund whether we were paying B.A.S (R & D) or not, there's nothing in the law that allows us to hold that refund. So if Mr Colautti and the directors request for us to do that, they requested us to do that.[67]

81 The defendant relies on the evidence of Mr Zafiriou to demonstrate the good faith defence under s 588FG of the Act. In my view, Mr Zafiriou's evidence falls short of the mark in this regard. He has provided basically subjective opinion evidence and he is not an independent expert witness. On the other hand, the matters raised by the Liquidator and R&D which have been substantiated on the evidence, leads to the conclusion that a reasonable person in the defendant's circumstances would have had grounds for suspecting that R&D was not solvent.

(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: [emphasis added]

(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

(b) an order directing a person to transfer to the company property that the company has transferred under the transaction;

(c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

(d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:

(i) money that the company has paid under the transaction;

(ii) proceeds of property that the company has transferred under the transaction;

(e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;

(f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned - an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;

(g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;

(h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;

(i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;

(j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.

83 The defendant submits that the Court has a discretion as to whether to make any order under s 588FF of the Act even when a liquidator satisfies the Court that the transaction is voidable and that the Court should exercise its discretion not to make any order under s 588FF of the Act in this proceeding. The defendant submits there are no grounds, whether legal or policy, to order the defendant to make payment of an amount from the consolidated revenue of the Commonwealth to the Liquidator given the matters that gave rise to the Cyberduck Credit and the fact that it is now known that Cyberduck was never entitled to claim the Cyberduck Credit.

84 In Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation,[68] Einstein J considered whether the Court had a discretion to refuse to make an order where there was a finding that there was a voidable preference. His Honour said:

Cashflow submitted and I accept that the presence of the word 'may' in section 588FF does not mean that there is a discretion in the Court concerning whether to make an order in the circumstances of the present case. In this regard, I accept the following propositions which were put forward by way of Cashflow in its submissions as correct:

(i) Section 588FF more naturally reads as conferring a jurisdiction on the Court, rather than stating that there is a discretion in the Court.

(ii) The jurisdiction that is conferred by section 588FF(1) is to make 'one or more of the following orders'. There is, I accept, clearly a choice to be made by the Court as to which of the orders, in the list set out in paragraphs (a) to (j) of section 588FF(1), is appropriate to be made. That does not mean that, once the Court is satisfied that the circumstances exist which make it appropriate for a preference or uncommercial transaction to be set aside, there is then some separate discretion which the Court can exercise on 'palm tree justice' grounds, in deciding whether to actually make the order.

(iii) The power conferred by section 588FF is one where:

'The word 'may' is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise.'

[Per Windeyer J Finance Facilities Pty Ltd v Federal Commissioner of Taxation [1971] HCA 12; (1971) 127 CLR 106 at 134-135 (with whom Barwick CJ agreed at 128). See also at 138-139 per Owen J.]

(iv) The decision in Re Pacific Hardware Brokers (Qld) Pty Ltd (1997) 16 ACLC 442, concerns a different situation to the present. That was a case where company funds were used to purchase an asset (an engagement ring) which was given to an unsuspecting third party. The question was whether the third party should be ordered to pay the value of the asset to the company. It is understandable that there might be a discretion in such a case. In any event, the discretion was there exercised in favour of ordering the payment of the money.[69]

85 In Cussen v Sultan,[70] Nicholas J took a similar approach. He referred to the decision of Einstein J in Cashflow Finance Pty Ltd and said:

With respect, I agree with the decision of Einstein J, and with his reasons.

Section 588FF(1) entitles the liquidator to apply to a court for an order for the recovery of monies paid under an uncommercial transaction or as an unfair preference. The provision is to be construed in the context of the other provisions of Pt 5.7B which is concerned with the recovery of property or compensation for the benefit of creditors of an insolvent company, and with regard to s 15AA Acts Interpretation Act 1901 (Cth) which requires preference for an interpretation which promotes the underlying purpose of the Act. As explained by Doyle CJ in Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651, p 659 in rejecting a submission that the provision conferred a discretion on the court, the purpose of the contextual provisions is to avoid the conferring of preferential benefits, which is achieved by ordering repayment on the application of the liquidator. These considerations support the conclusion that the authority conferred by s 588FF(1) must be exercised when the liquidator seeks recovery in respect of a voidable transaction. It is in the exercise of that authority that the court has a wide discretion as to the form and terms of orders to be made in a particular case. [71]

86 However, in Re D Pty Ltd (in liq),[72] Moshinsky J expressed the opposite view. His Honour said:

Different views have been expressed as to whether s 588FF(1) confers a discretion or, rather, a jurisdiction. The view that s 588FF(1) confers a discretion was assumed or held in: BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 at [157], [171] (Spigelman CJ, Mason P and Handley JA agreeing); Ansell Ltd v Davies (2008) 219 FLR 329; [2008] SASC 203 at [52] (Doyle CJ, Anderson and David JJ agreeing); and New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 257 ALR 740 at [59] (Barrett J). See also Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 81 NSWLR 47 at [244], [258]-[261] (Young JA). On the other hand, the view that the provision confers a jurisdiction was taken by Einstein J in Cashflow Finance Pty Limited (in liq) v Westpac Banking Corporation [1999] NSWSC 671 at [569]; by Nicholas J in Cussen v Sultan (2009) 74 ACSR 496; [2009] NSWSC 1114 at [24]- [30] and by Flick J in Kazar, in the matter of Frontier Architects Pty Limited (2010) 81 ACSR 158; [2010] FCA 1381 at [28]. See Assaf et al, supra, at [8.43]. To the extent that it is necessary for the determination of the present matter, I consider s 588FF(1) to confer a discretion, at least where, as here, the relief sought is declarations under s 588FF(1)(h) and (j). This reflects the terms of the provision and the view expressed in the appellate authorities to which I have referred.[73]

87 The Full Court of the Federal Court also considered whether the Court had a discretion. In Great Investments Ltd v Warner,[74] Jagot, Edelman and Moshinsky JJ said:

Different views have been expressed as to whether s 588F(1) confers a discretion or, rather, a jurisdiction. The latter view was taken by Einstein J in Cashflow Finance Pty Limited (in liq) v Westpac Banking Corporation [1999] NSWSC 671, [569] and Nicholas J in Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496, 503-505 [24]-[30]. However, the view that s 588FF(1) confers a discretion was assumed or held in BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322, 352 [157], 354 [171] (Spigelman CJ, Mason P and Handley JA agreeing); Ansell Ltd v Davies [2008] SASC 203; (2008) 67 ACSR 356, 364-365 [52] (Doyle CJ, Anderson and David JJ agreeing); and New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 72 ACSR 638, 649 [59] (Barrett J). See also Buzzle Operations Pty ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWSC 109; (2011) 81 NSWLR 47, 78 [244], 79 [258]-[261] (Young JA); Assaf F, Shields B and Kincaid H, Voidable Transactions in Company Insolvency (LexisNexis Butterworths, 2015), [8.43]. It is unnecessary to decide this issue because (for the reasons set out below) assuming a discretion exists, no grounds are shown not to make an order as contemplated by s 588FF(1). We will proceed on the assumption that the provision confers a discretion.[75]

88 I agree with the views of the Full Court of the Federal Court. The Liquidator and Cyberduck submit that even if a discretion exists, it is not appropriate for such a discretion to be exercised here. They say that the defendant has identified no analogous case that entails the exercise of discretion to equivalent effect and that the purported exercise of discretion is vague and is informed by false premise.

89 In my view, the discretion should be exercised in favour of the defendant because Cyberduck was never entitled to claim the Cyberduck Credit. That also impacts on the preference claim made by R&D. I agree with the defendant that there are no grounds, whether legal or policy, to order the defendant to make payment of an amount from the consolidated revenue of the Commonwealth, given the matters that gave rise to the Cyberduck Credit and the fact that it is now known that Cyberduck was never entitled to claim the credit. Neither Cyberduck nor R&D should get what would in effect be a windfall.

90 The Liquidator and Cyberduck's application and the Liquidator and R&D's application are dismissed.

[1] [2007] NSWCA 191; (2007) 63 ACSR 557 at [97].

[4] [2006] NSWSC 1132; (2006) 205 FLR 186 at [119].

[5] [2009] NSWSC 1114; (2009) 74 ACSR 496 at [21].

[6] Harmer Report, General Insolvency Inquiry (Australian Law Reform Commission Report 45), [629].

[7] Explanatory Memorandum to the Corporations Law Reform Bill 1992, [1035].

[8] [1997] FCA 1220; (1997) 25 ACSR 535 at 548.

[9] [2017] NSWSC 539, [36].

[18] T77-16. He and Mr Traianedes were unable to get Mr Symonds credit cards because they are personal records not company records

[28] T94-26 and T99-1. The liquidator explained that other items would also need to be taken out of the balance sheet if the Sage Interactive amounts were taken out.

[35] [2007] FCAFC 185; (2007) 164 FCR 83.

[40] [2003] NSWSC 936.

[41] [2003] FCA 1336; (2003) 203 ALR 609.

[42] [2006] FCA 885; (2006) 58 ACSR 555.

[43] [2003] NSWSC 936, [69]-[70].

[44] [2003] FCA 1336; (2003) 203 ALR 609, [14].

[45] [2006] FCA 885; (2006) 58 ACSR 555, [107].

[46] [2017] NSWSC 901.

[47] [2017] NSWSC 901 [66].

[48] [2009] FCA 893; (2009) 259 ALR 339.

[50] [2012] FCAFC 124; (2012) 205 FCR 156.

[52] [2015] FCA 357.

[55] T147-1 and Brown statement at [20].

[68] [1999] NSWSC 671.

[70] [2009] NSWSC 1114; (2009) 74 ACSR 496.

[72] [2016] FCA 1409.

[74] [2016] FCAFC 85; (2016) 243 FCR 516.