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[2009] VSCA 319
appellant. Appeal allowed. Declaration under s 588FF that each of the six credits (18 Mar 2004 $140,543.28; 5 May 2004 $159,564.34; 29 May 2004 $140,133.84; 9 July 2004 $147,733.49; 19 Aug 2004 $127,655.33;...
Jetaway Logistics owed substantial PAYG and GST tax and was entitled to diesel fuel rebate payments administered by the ATO. The company authorised the ATO to apply six rebate payments against its tax account between March and August 2004. The liquidators sued to recover those credits as unfair preferences. The Court of Appeal held that, by 18 March 2004 and thereafter, the Commissioner had actual notice of facts (broken payment promises, an admission by the company's financial manager that only the rebate funds were available, growing tax arrears and failure to remit withheld PAYG) that a reasonable person in the Commissioner's position would have concluded showed the company was insolvent. Because s 553C(2) bars set-off where a creditor had notice of insolvency, the Commissioner could not set off the credits against his proof of debt; the credits were voidable preferences recoverable by the liquidators. The appeal was allowed and the ATO was ordered to repay $875,542.06 with interest.
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Jetaway Logistics Pty Ltd fell into arrears with its PAYG and GST obligations in late 2003. The company was also entitled to payments under the Commonwealth Diesel and Alternative Fuels Grant Scheme, which the Australian Taxation Office (ATO) administered and which the Commissioner was obliged to pay (para 5). On 16 March 2004 the company authorised the Commissioner to withhold such rebate payments and apply them against its taxes. Between 18 March and 25 August 2004 six such rebate payments were credited to the company's account with the ATO, totalling $875,542.06 (paras 3-6).
The company was insolvent at all relevant times (it was common ground that insolvency existed by 18 March 2004) and was placed into administration on 6 September 2004 and wound up on 1 October 2004, so each credit fell within the relation-back period (para 7). The liquidators sought recovery of the six credits as unfair preferences under s 588FA, by exercise of the recovery remedy in s 588FF. The Commissioner argued that set-off under s 553C(1) meant that, if the credits were set aside, he could prove for the tax debts and therefore did not receive more than he would have on the liquidation, so no unfair preference arose (para 8-9). The central question on appeal was narrower: whether at the time the Commissioner received each credit he had 'notice of the fact that the company was insolvent' within the meaning of s 553C(2), in which case set-off would be excluded and the credits recoverable (paras 1-2, 10).
The Court of Appeal examined the factual material known to the ATO (internal officer notes, repeated broken payment promises by the company’s financial manager Mr Baker, admissions that only rebate funds were available, increasing tax arrears, BAS returns, and the failure to remit withheld PAYG amounts) and concluded that by 18 March 2004 the only reasonable inference was that Jetaway lacked the ability to pay its debts as they fell due. The Commissioner therefore had notice of insolvency when the credits were received; set-off was excluded and the credits were voidable preferences. The appeal was allowed and the ATO ordered to repay $875,542.06 plus interest (paras 30-41, 50-51).
Legal rule: s 553C(1) allows mutual set-off between an insolvent company and a creditor proving in the winding-up, subject to s 553C(2), which disallows set-off where, at the time of giving or receiving credit, the person had "notice of the fact that the company was insolvent" (para 9). The Court’s construction of "notice of the fact" was determinative.
Construction of 'notice of the fact': the Court rejected two alternative constructions urged by the parties. The liquidators sought a meaning that would embrace constructive notice (i.e. notice produced by reasonable inquiries). The Commissioner urged a high test, effectively requiring notice of an act that would support a winding-up petition under s 459C(2) or proof of actual insolvency. The Court rejected both. It held that "notice" in s 553C(2) means actual notice of facts which disclose insolvency; Parliament knows how to provide for constructive notice when it intends that (para 18). The Court then adopted the formulation (from Robson J and applied) that the liquidators must establish that the Commissioner had notice of facts which would have indicated to a reasonable person the fact that Jetaway was insolvent (para 21). The test is objective: whether the known facts would have disclosed insolvency to a reasonable person in the position of that particular creditor, assessed with the knowledge and experience of that creditor (paras 21, 26).
Application to the facts: the Court examined the contemporaneous ATO notes and company communications. It highlighted the repeated unfulfilled promises to pay (20 Feb – 15 Mar 2004), Mr Baker’s admission on 18 March that the company had insufficient funds and expected to rely only on diesel rebate payments, the ongoing failure to remit PAYG deductions, and the accumulation of tax liabilities. Those facts, taken together, meant the company was not merely suffering temporary illiquidity; the only reasonable inference available to a reasonable person in the Commissioner's position was insolvency by 18 March 2004 (paras 30-41). The Court found the same or continuing posture for the subsequent credit dates (paras 42-49).
No special treatment for the Commissioner: the Court rejected an argument that the Commissioner should be given "latitude" because he is an involuntary creditor (paras 23-26). Authorities cited by the Court (including Cussen and D'Aloia) support treating the Commissioner as a creditor to which the ordinary objective test applies, though with the Court recognising the creditor-specific perspective (paras 24-25).
Result: because the Commissioner had notice of insolvency at the times he received the credits, s 553C(2) operated to exclude set-off, so the credits constituted unfair preferences under s 588FA and were recoverable under s 588FF. The Court allowed the appeal and ordered repayment with interest (paras 50-51).
Before: There was existing authority on insolvency as a question of fact and the need to consider commercial realities when determining solvency (Sandell v Porter [1966] HCA 28; Lewis v Doran; Evans & Tate) (paras 11-14). There was less settled authority on what "notice of the fact that the company was insolvent" in s 553C(2) precisely meant. Arguments had ranged from constructive notice (implying an obligation to inquire) to a high threshold akin to notice of matters set out in s 459C(2) (para 17).
After: The Court clarified the meaning of s 553C(2) for the Victorian Court of Appeal’s jurisdiction and set a binding practical test: "notice of the fact" requires actual notice of facts which, to a reasonable person in the position of that creditor, disclose inability to pay debts as they fall due (paras 18, 21, 26). Constructive notice and mere suspicion are insufficient; s 553C(2) requires proof of actual notice of disclosing facts. The creditor-specific reasonable-person standard means courts will assess whether the creditor's own knowledge and experience would have warranted concluding insolvency. The decision therefore narrows the circumstances in which set-off is excluded (compared to a broader constructive-notice approach), while still allowing a finding of notice where contemporaneous facts made insolvency the reasonable inference (paras 18-22, 26).
"There is no basis for reading the word 'notice' in s 553C(2) as meaning anything other than actual notice." (para 18)
"... the test that the liquidators have to establish is that the Commissioner had notice of facts that would have indicated to a reasonable person the fact that Jetaway was insolvent." (para 21)
"In our view, the only inference reasonably open in these circumstances was that the company was on 18 March 2004 unable to pay its debts as and when they fell due..." (para 41)
"Under s 553C(2), the question is whether the particular creditor had notice of the fact of insolvency...with the knowledge and experience of that creditor." (para 26)
This decision is triggered where:
Critical features that support a finding of 'notice of the fact': explicit admissions by company officers of inability to pay or of relying solely on a specific source (e.g. rebate payments) to meet liabilities; repeated unmet promises to pay; accumulated unpaid tax liabilities; sustained failure to pass on withheld taxes. Any such pattern that collectively makes insolvency the only reasonable inference will satisfy this judgment's test (paras 30-41, 46-49).
This decision clarifies the test for s 553C(2) at least within the Victorian Court of Appeal and potentially persuasive elsewhere: the judgment aligns with authorities emphasising insolvency as a question of fact and the importance of commercial realities (Sandell; Lewis v Doran; Evans & Tate) (paras 11-14). It expressly rejects treating 'notice' as constructive and rejects arguments for special latitude for the Commissioner (paras 18, 23-26). Courts considering similar factual matrices will apply the objective reasonable-creditor test set out here: look to what the specific creditor actually knew and whether those facts would disclose insolvency to a reasonable person in its position. The judgment refers approvingly to Cussen and D'Aloia, indicating consistency with recent authority that treats the Commissioner neither specially nor leniently in this context (paras 24-25). Practitioners should expect subsequent courts to follow the Court of Appeal’s articulation when addressing s 553C(2) issues.
The borderline between "mere suspicion" and "notice of the fact": The Court rejected a 'reasonable grounds for suspecting' standard but declined to decide whether an inference of insolvency must be the only reasonable inference available, or simply the only reasonable inference of weight. The Court said that question should await a case where it arises (para 22). Future cases will need to clarify how courts treat competing reasonable inferences.
Degree of inquiry required in other creditor contexts: The Court rejected an obligation to make further inquiries on the Commissioner (paras 23-26). But it left open the intensity of investigation a creditor must undertake before its knowledge will be held to include certain facts. The Court's creditor-specific reasonable-person test means that in some contexts, where a creditor has more expertise or access to information, the evidential threshold may effectively be higher.
Boundaries of 'actual notice of facts': The Court held 'actual notice of facts' is required, not constructive notice (para 18). However, further delineation may be required where a creditor has partial information or ambiguous communications from the company. How much factual content must be communicated to constitute 'actual notice' will be a matter for future refinement.
Application to other statutory set-off contexts: The Court contrasted s 553C(2) with other statutory formulations (e.g. Bankruptcy Act equivalents). Differences in statutory wording imply potentially different tests in other contexts; this decision does not resolve how other regimes with different wording should be interpreted (para 19).
Practical proof in different evidential settings: Here the Court relied on ATO officer notes and admissions. In other cases, documentary records may be less clear; courts will have to decide how strongly contemporaneous internal notes weigh in establishing 'notice of the fact' and what corroboration is required.
In sum, Jetaway Logistics clarifies that s 553C(2) turns on actual knowledge of facts which, to a reasonable person in the creditor’s position, disclose insolvency. The decision gives liquidators a clear analytical pathway to challenge set-off claims where creditors had contemporaneous factual knowledge warranting the inference of insolvency. Practitioners should focus on the contemporaneous record available to the creditor and be prepared to argue whether the known facts, viewed objectively from the creditor's position, compelled a conclusion of insolvency.
Jetaway Logistics Pty Ltd (receivers and managers appointed) (in liquidation) v The Deputy Commissioner of Taxation [2008] VSC 397.
CORPORATIONS - Insolvency - Unfair preferences - Unpaid tax liabilities - Company entitled to credits under fuel grants scheme - Scheme administered by Commissioner - Commissioner set-off credits against tax debt - Company insolvent at all relevant times - Whether Commissioner received more from company than if set-off transactions set aside and Commissioner proved for full debt - Whether Commissioner had 'notice of the fact' of company's insolvency - Corporations Act 2001 (Cth) 95A, 553C, 588FA(1).
WORDS AND PHRASES - 'Solvency' - 'Notice' - 'Notice of the fact that the company was insolvent'.
1 This appeal is brought by the company in liquidation, Jetaway Logistics Pty Ltd, and its liquidators, seeking orders pursuant to s 588FF of the Corporations Act 2001 (Cth) to recover six credits given to the respondent, the Deputy Commissioner of Taxation, on the ground that they were unfair preferences.
2 The appeal raises one issue only. The five other grounds were abandoned at the commencement of the hearing. It is whether the liquidators established at trial that, at the time the Commissioner received each of the credits, he had 'notice of the fact that the company was insolvent', within the meaning of s 553C(2).
4 It was common ground before the judge that the company was in fact insolvent by 18 March 2004.
How the credits came to be given to the Commissioner
5 In late 2003 the company fell behind in its payment obligations to the Commissioner in respect of PAYG deductions from wages paid and in respect of GST payable on sales. At the same time, the company was entitled to receive payments under the Diesel and Alternative Fuels Grant Scheme of the Commonwealth. This scheme was administered by the Commissioner, who was obliged to make the payments. On 16 March 2004 the company authorised the Commissioner to withhold the payments due to it under the scheme and to apply them in reduction of its liabilities to the Commissioner for PAYG instalments and GST, which then totalled $215,439.66.
6 The six scheme payments dealt with under this authority between 16 March and 25 August 2004 are the credits the subject of the preference claim. After crediting the last of these payments, the liability of the company on its running account with the Commissioner was $240,273.21.
7 The company traded on, and on 6 September 2004 went into administration under Part 5.3A. On 1 October 2004 its creditors resolved that it be wound up pursuant to s 439C, so that each of the six credits was received within the relation back period. The liquidators contended that each of the credits was an unfair preference within the meaning of s 588FA(1) and recoverable as such pursuant to s 588FF.
8 The Commissioner's contention was that he was entitled to set off the scheme payments against the company's tax liabilities, and that the transactions had not resulted in him receiving more from the company in respect of those liabilities than he would receive if the credits were set aside and he proved for the tax debt in the winding up. There was, accordingly, no unfair preference within the meaning of s 588FA(1).
9 The right of set-off upon proof of debts is established by s 553C(1), which provides as follows:
553C Insolvent companies - mutual credit and set-off
(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set-off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
10 As mentioned earlier, it was accepted that the company was in fact insolvent at the time of each credit and that, subject to the question of notice, they might have been set off against the company's tax liability in the Commissioner's proof of debt in the winding up, with the consequence that the unfair preference claim would fail.
11 Insolvency is defined in s 95A in this way:
95A Solvency and insolvency
(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
12 Ordinarily the mere inability to pay a particular debt when it falls due does not demonstrate insolvency. It may simply reveal a temporary lack of liquidity. The classic statement is that of Barwick CJ in Sandell v Porter:[1]
Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
The law is clear that solvency is, first and last, a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's position, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are available by sale or borrowing upon security, and when such realisations are achievable.[5]
14 The statement that a company is insolvent is usually conclusionary in nature. Unlike, for example, the fact of incorporation, solvency or insolvency is rarely a matter of straightforward proof. Rather, there must be an examination of the financial condition of the company, typically by reviewing its dealings over a period of time;[6] the identification of the symptoms (if any) of insolvency; and the making of a 'diagnosis' as to the ability of the company to pay its debts as they fall due.[7]
15 The conclusion is one to be drawn in all of the circumstances present at the time, as known to the creditor. This might include the nature of the debtor's business and, perhaps, its cyclical nature. It might also include the character of the debt. And so, it was said, the Commissioner would know that taxpayers do not always pay on time, so that a failure to make a timeous payment of tax might not be as significant as might be the case of some other payment to some other creditor.
16 Against that background, we turn to consider what should be regarded as constituting 'notice of the fact that the company was insolvent'. There is a surprising dearth of authority on the point, as became clear in the course of submissions on the appeal.
17 On the one hand, counsel for the liquidators argued that s 553C(2) should be construed as importing the equitable concept of constructive notice, such that a creditor would be taken to have had notice of all matters of which it would have had notice had it made reasonable inquiries.[8] On the other hand, counsel for the Commissioner argued - as he had before the primary judge - as follows:
For the purposes of s 553C of the Act, notice of the fact the company was insolvent would be found only where there was notice of an act or omission of the company which would found a petition to wind up that company upon the ground that the company was unable to pay its debts, or where there was notice of actual insolvency. This is a high test.
In other words, it would have to be shown that the Commissioner had had notice of one of the matters set out in s 459C(2).
1"> 18 Both these submissions must be rejected, in our view. As to the first, there is no basis for reading the word 'notice' in s 553C(2) as meaning anything other than actual notice. As Palmer J said in Lewis v Doran[9] in relation to s 95A, the words must be construed 'as they stand, without addition or subtraction'. When Parliament intends that 'notice' should include both actual notice and constructive notice, express provision to that effect is made, as might be expected. For example, as senior counsel for the liquidators properly pointed out, s 278(2) provides: 'A reference in this Part to a person having notice of a charge includes a reference to a person having constructive notice of the charge'.[10]
19 As to the second, the matters set out in s 459C(2) are the company law equivalent of the acts of bankruptcy set out in s 80(1) of the Bankruptcy Act 1966 (Cth). Each of them establishes only a presumption of insolvency,[11] and only for the purposes listed in s 459C(1). Section 553C(2) is concerned with the fact of insolvency, which is quite different. The provision may be contrasted with s 86(2) of the Bankruptcy Act 1966 (Cth), under which set-off is not available if the creditor at the relevant time had notice of 'an available act of bankruptcy.'[12]
20 It is also clear, as Robson J held, that s 553C(2) requires more than 'reasonable grounds for suspecting' insolvency. As his Honour noted, the Harmer Report on Insolvency recommended a test in these terms, but the recommendation was not accepted. A test of that kind was adopted in s 588FG(2)(b), but what must be proved under s 553C(2) is that the creditor had notice of the fact of insolvency.
21 The section requires proof, not that the creditor at the relevant time knew the company to be insolvent, but that the creditor had notice of that fact. As to what constitutes such notice, in our view Robson J was correct when he said:
... the test that the liquidators have to establish is that the Commissioner had notice of facts that would have indicated to a reasonable person the fact that Jetaway was insolvent.
A person will have 'notice of the fact' that a company is insolvent if the person has actual notice of facts which disclose that the company lacks the ability to pay its debts when they fall due, within the meaning of s 95. It is unnecessary to show that the person actually formed the view that the company lacked that ability. As the New South Wales Court of Appeal said in Hathaway Shirt Co Pty Ltd v B Rawe GmbH Company,[13] it is 'well established that there is a difference in law between receiving notice of a fact and being made fully and subjectively aware of the fact'.
22 What is required is proof of facts known to the creditor which warranted the conclusion of insolvency. Since 'grounds for suspecting' insolvency will not suffice, it is not enough that insolvency is a possible inference from the known facts. Whether it must be the only reasonable inference open is a question we need not decide. In the present case, as will appear, we consider that the only inference reasonably open to the Commissioner, from what was known to his officers at the relevant times, was that the company was insolvent. It must be doubted whether a creditor could be said to have had 'notice of the fact' of insolvency if another inference, consistent with solvency, was also reasonably open on the known facts. But consideration of that question should await a case where it falls for determination.
23 Counsel for the Commissioner submitted that courts had in the past allowed the Commissioner 'a certain amount of latitude' when applying disentitling provisions such as s 553C(2), and that this Court should do likewise. The justification for such 'latitude' was said to be that the Commissioner 'has no choice' about those whose creditor he becomes. Unlike commercial parties which freely enter into transactions, the Commissioner is in this sense an involuntary creditor.
24 In our view, this proposition must be rejected. It is unsupported by authority and is contrary to principle. Counsel relied on the decision of the New South Wales Court of Appeal in Cussen (as liq of Akai Pty Ltd (in liq)) v Commissioner of Taxation,[14] where Spigelman CJ referred to the Commissioner as 'no ordinary creditor'.[15] While the description is undoubtedly correct, what matters for present purposes is that his Honour twice rejected submissions (advanced by the liquidators of a taxpayer company) that the Commissioner should be viewed as being in a special position, first as to 'perspicacity and financial acumen'[16] and secondly as to the imposition of an implied obligation to make further inquiries in relation to the solvency of that company.[17]
25 The other authority referred to was D'Aloia (as liq of Damark RV Investments Pty Ltd (in liq)) v Federal Commissioner of Taxation,[18] which also concerned s 588FG(2). Justice Merkel there expressed a preference for treating the Commissioner as a creditor having 'the relevant business qualifications ... of a person within the Australian Taxation Office who is responsible for collecting the taxation liabilities of tax-payers in accordance with the laws of the Commonwealth'.[19] His Honour did not need to decide the point but it is clear that - far from giving the Commissioner 'latitude' - his Honour would have attributed to the Commissioner a higher level of business acumen than the 'ordinary' creditor.[20]
26 Under s 553C(2), the question is whether the particular creditor had notice of the fact of insolvency. Since insolvency is an objective fact, the test must be whether the known facts would have disclosed the company's insolvency to a reasonable person in the position of the particular creditor, that is, with the knowledge and experience of that creditor. There is no justification for giving the Commissioner any 'latitude' in this regard.
Did the Commissioner have notice of the fact of insolvency?
27 As mentioned earlier, the question whether the Commissioner had notice of the company's insolvency is to be determined by examining what was known to the Commissioner at the relevant times, based on the state of the company's indebtedness for tax, the information in its returns and the dealings between ATO officers and officers of the company.
28 The company's dealings with the Commissioner were unremarkable until January 2004. On 15 January its running account with the ATO was debited with $160,196 for PAYG tax and $50,380 for GST, taking the running debit balance to $210,575.06 This balance was in respect of tax liabilities incurred up to and including November 2003. On 23 January, the account recorded a payment of $61,176 which was the GST and PAYG liability for trading in the month of December 2003. This was the last payment made by the company.
29 In the period until 18 March 2004, the company's indebtedness grew to $215,439.66. This included a credit for GST in the sum of $90,479 for trading in December 2003. (This seems to have been an error, since the credit had been brought to account in the company's payment of $61,176 to which we have referred.)
30 On 20 February 2004 the ATO officer concerned, Maria Palma Riccioletti, telephoned the company's financial manager, Craig Baker, enquiring about payment of the sum outstanding. Her note recorded Mr Baker as saying that payment in full would be made on 23 February 2004. She recorded in another memo of the same date Mr Baker's explanation for the non-payment, which was that it was 'due to lack of funds from their debtors'. She recorded him as saying that 'after redirecting the company and being able to educate their debtors they now are back on track'.
31 The payment promised for 23 February 2004 was not made. In response to an enquiry from Ms Riccioletti on 27 February 2004, Mr Baker apologised and said that the expected funds had not come through on the due date. When she asked why he had not advised her that there would be a delay, he again apologised and informed her that 'the company has received funds now'. He 'promised payment [would] definitely be made by 5 March 2004'. Ms Riccioletti warned him that further default would attract legal action.
32 On 25 February 2004 the company lodged its BAS return for the month of January 2004.[21] This return showed that the sales for the month were $2.4m, a figure which was consistent with those for November and December 2003. The company's non-capital purchases were about $1.5m, a little less than in those previous months. The return showed capital purchases of nearly $1.7m, about the same as in December 2003. There were no such purchases in November 2003. The figures showed a gross trading profit in January of about $900,000, which was a little higher than in previous months, but said nothing about the cash flow position, which would depend upon other factors.
33 The return for January 2004 showed a wages bill of about $600,000, a figure approximating that in November 2003. The comparable item in the December 2003 BAS return is puzzling; it showed a total wages bill of about $150,000 and that all of this amount had been withheld for PAYG tax. In any event, the wages figure for January consumed nearly all of the gross trading profit earned for that month. As to the tax liability, the BAS return for January showed a negative GST liability of $73,841 and a PAYG liability of $148,700, a net liability for that month of $74,589.
34 The payment which had been 'definitely' promised for 5 March 2004 was not made. When Ms Riccioletti called Mr Baker on 9 March seeking an explanation, he said that he had left instructions for the payment to be made while he was on leave from 3 March. He said he had just returned from leave and would follow the matter up. Ms Riccioletti told Mr Baker that if no payment was received by noon that day, the case would 'stream into pre-legals to proceed with legal action'. On this date, too, the company lodged a diesel fuel rebate claim in respect of purchases of fuel in February.
35 No payment had been made by 15 March when Ms Riccioletti again telephoned Mr Baker. On that date he told her that he had been busy and that the debt had not been paid 'due to financial difficulty in paying in full'. She suggested that he might authorise the ATO to retain the diesel fuel rebate payments, which were running at about $130,000 per month, and enter into a payment arrangement to pay the outstanding debt plus interest which was then about 12.31 per cent. The conversation finished with Mr Baker stating that he would 'overview all the financials to be able to submit a true commitment for a payment arrangement to pay off this debt'.
36 The set-off authority with respect to the scheme payments was received by the ATO on 16 March 2004. At 1.10 pm South Australian time on 18 March Ms Riccioletti telephoned Mr Baker. She informed him that the authority had been received, but asked why he had not contacted her 'with firm commitment to enter into a payment arrangement.' She recorded his response as follows:
Craig [Baker] apologised, he informed reason for not ringing is because could not commit for a payment arrangement on behalf of the company.
He continued informing that the company has insufficient funds to commit at present, the only money at this stage would be the monthly Diesel Grant to be used until all the Integrated Client Account debt is paid off including GIC.
37 Coming as it did from the financial manager of the company, and in the circumstances then existing, this statement amounted to an admission that the company was unable to pay the unpaid tax which had long since fallen due for payment. Importantly, it was also an admission that the company had no expectation of making payment from funds likely to be available to it in the short term, other than credits under the diesel rebate scheme. Together with the non-fulfilment of Mr Baker's successive promises about funds from other sources, the information in the Commissioner's hands demonstrated very clearly, in our view, that this was no temporary liquidity problem.
38 Immediately after this conversation, at 1.20pm, Ms Riccioletti telephoned the ATO to speed up the process of getting the credit processed. On the same day, 18 March 2004, the first credit of $140,543.25 was received by the Commissioner under the set-off authority. It is on this date that the first question as to the Commissioner's notice of insolvency arises.
39 We take into account the Commissioner's knowledge that the company's business was that of line haul transporting contractor. He was aware, too, that, of the tax payments in respect of the 11 months to December 2003, all but that for February 2003 had been paid on time. He was aware that the company had made capital purchases in December 2003 and January 2004 of about $3.5m, and that the sales figures were steady and substantial. Likewise, he knew that diesel fuel purchases were steady, as the amounts of rebate were standing at between $130,000 and $150,000 per month.
40 The signs of insolvency were, however, very clear by 18 March. As already noted:
41 In our view, the only inference reasonably open in these circumstances was that the company was on 18 March 2004 unable to pay its debts as and when they fell due and that his Honour fell into error in reaching the contrary conclusion. The information in the hands of the Commissioner made it clear that on that date the company was unable to pay its tax debts. By that date the company had had ample opportunity to explore all avenues open to it to obtain additional funds. It was made unambiguously clear to the Commissioner on that date that all such possibilities had been exhausted, and that no others were in prospect. We are satisfied that, at the time of the first credit, a reasonable person in the position of the Commissioner and knowing the facts which he then knew, would have concluded that Jetaway was insolvent.
42 Immediately prior to this credit on 5 May 2004, the balance owing to the Commissioner had grown from $74,896.38 after the March credit to $710,231.98. This was the result of the debiting of tax for January, February and March trading.
43 From time to time in this period, Mr Baker gave Ms Riccioletti assurances that the company would meet its obligations to the Commissioner, but these were not specific and were never fulfilled. In particular, Mr Baker said on 30 March that the company was refinancing so that its 'cash flow' problem would be solved and the company would meet its future obligations in two weeks. Once again no payment was made.
44 By fax dated 23 April 2004, the company advised the Commissioner that Mr Baker's role had been passed to Barry McCann. But there was no sign of any change under the management of the new accountant. The February and March BAS activity statements, lodged at about this time, showed no diminution of sales, which were about $2.5m and $2.9m respectively. Wages were constant at about $600,000 per month. Amounts withheld for PAYG tax totalling some $330,000 in aggregate were not passed to the Commissioner, and GST liability continued to accrue. Diesel fuel rebates continued at about $150,000 per month.
45 It was contended for the Commissioner that this information warranted the inference that the company was continuing to trade at a satisfactory level. But if that were so, the company's admitted inability to meet its obligations to the Commissioner was inexplicable. In our view, once again, the only reasonable inference as at 5 May 2004 was that the company was insolvent.
46 It is convenient to deal with these four credits collectively. The information in the hands of the Commissioner after 5 May 2004 did not suggest any improvement in the position of the company or that the facts indicating insolvency in May should be seen in a different light. On 20 May 2004, the company lodged its BAS for the month of April. As at 30 April 2004, the running balance was $789,406.64. No further BAS returns were lodged after that date.
47 Indeed, on 24 May 2004 Terry Mayton, a director of the company, wrote to the Commissioner that the company was unable to pay its April BAS liability of $238,739 by the due date on 21 May. This was, of course, only the current BAS liability. The balance for earlier liabilities was over $500,000 so that the amount payable prior to the 29 May credit was nearly $800,000.
48 No further communications, proposals or explanations from the Commissioner are in evidence.
49 We are satisfied that, at the time of each of these four credits, the Commissioner had notice of the insolvency of the company.
50 It follows that, in respect of each credit, set-off pursuant to s 553C was not available. Accordingly, they are unfair preferences and are recoverable pursuant to s 588FF.
51 The appeal must be allowed and the following orders made in lieu of his Honour's order of 9 October 2008:
[1] [1966] HCA 28; (1966) 115 CLR 666, 670.
[2] Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410, [107].
[5] See Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, 224; Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175, [106] (affirmed [2005] NSWCA 243; (2005) 54 ACSR 410).
[6] See, eg, Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation [1998] VSCA 76; [1999] 1 VR 489, [58]-[66]; Cussen (as liq of Akai Pty Ltd (in liq)) v Commissioner of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530, [51]-[54].
[7] Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410, [109].
[8] See, eg, Australian Central Credit Union v Commonwealth Bank of Australia (1991) 4 ACSR 145, 152; SCEGS Redlands Ltd v Barbour [2008] NSWSC 928, [37]-[45].
[9] [2004] NSWSC 608; (2004) 50 ACSR 175, [106].
[10] See also Property Law Act 1958 (Vic) s 199(1).
[12] See Re Hardman (1932) 4 ABC 207; Law v James [1972] 2 NSWLR 573; Thomas v Hatzipetros (1997) 24 ACSR 286.
[13] (Unreported, Supreme Court of New South Wales Court of Appeal, Gleeson CJ, Samuels and Clarke JJA, 25 July 1989).
[17] Ibid [114]. The point arose there not under s 553C(2) but under s 588FG(2).
[20] The point under s 588FG(2) appears to have been resolved by the New South Wales Court of Appeal in Cussen (as liq of Akai Pty Ltd (in liq)) v Commissioner of Taxation [2004] NSWCA 383; (2003) 51 ACSR 530, [31], where the Court endorsed the 'average business person' test enunciated by Young J in Harkness v Commonwealth Bank of Australasia Ltd (1993) 32 NSWLR 543, 546.
[21] It was not, however, processed until on or about 27 March 2004.
Jetaway Logisitics Pty Ltd & Ors
Deputy Commissioner of Taxation [2009] VSCA 319
(1966) 115 CLR 666
(2001) 53 NSWLR 213
(1993) 32 NSWLR 543
Appeal allowed. Declaration under s 588FF that each of the six credits (18 Mar 2004 $140,543.28; 5 May 2004 $159,564.34; 29 May 2004 $140,133.84; 9 July 2004 $147,733.49; 19 Aug 2004 $127,655.33; 25 Aug 2004 $159,911.78) were voidable transactions; order that the defendant pay the plaintiff $875,542.06 plus statutory interest (paras 50-51).