Mark Cooper v Commissioner of Taxation

CATCHWORDS : CORPORATIONS - Application by company and its liquidators under s 588FF of the Corporations Act 2001 (Cth) ("the Act") to recover from the Deputy Commissioner of Taxation payments made under alleged voidable transactions within meaning of s 588FE of the Act - No contest by Commissioner - Commissioner seeks indemnity under s 588FGA of the Act from company's director for part of the amount - Director contests insolvency and plead defences under ss 588FGB(3) and (4) - Whether insolvency established - Whether defences made out

Corporations Act 2001 (Cth) LEGISLATION CITED : Taxation Administration Act 1953 (Cth) Income Tax Assessment Act 1936 (Cth)

Powell v Fryer (2001) 37 ACSR 589 Melbase Corporation Pty Ltd v Segenhoe Ltd 17 ACSR 187 CASES CITED : Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87 Tourprint International Pty Ltd (in liquidation & Another) v Bott (1999) 32 ACSR 201 Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722

Mark Cooper (in his capacity as liquidator of ACN 113 168 040 Pty Ltd (in liquidation)) - Plaintiff PARTIES : ACN 113 168 040 (formerly Butler & Blackberry Pty Ltd - Second Plaintiff Commissioner of Taxation - Defendant Pierre Issa - Respondent

C. Brown - Solicitor [Plaintiffs] COUNSEL : D.M. Jay [Defendant/Applicant] P. Issa - Self Represented [Respondent]

Nash O'Neill Tomko Lawyers [Plaintiffs] SOLICITORS : Legal Services Branch, Australian Taxation Office [Defendant/Applicant] P. Issa - Self Represented [Respondent]

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

5657/08 MARK COOPER & ANOR v DEPUTY COMMISSIONER OF TAXATION JUDGMENT 1 HIS HONOUR: These are proceedings under s 588FF of the Corporations Act 2001 (Cth) ("the Act") by a company and its liquidator against the defendant Commissioner of Taxation ("the Commissioner") for orders directing the Commissioner to pay amounts equal to those earlier paid by the company to her under alleged voidable transactions within the meaning of s 588FE of the Act amounting to $126,952.99 and paid over the period 16 May 2007 to 4 October 2007 as follows:

16 May 2007 $11,000.00 22 May 2007 $15,511.18 12 June 2007 $18,000.00 19 June 2007 $ 5,000.00 5 July 2007 $22,441.81 12 July 2007 $20,000.00 7 August 2007 $15,000.00 3 September 2007 $10,000.00 4 October 2007 $10,000.00 2 The liquidator was appointed voluntary administrator of the company ACN 113 168 040 Pty Ltd (in liquidation), formerly known as Butler and Blackberry Pty Ltd ("the Company"), on 8 November 2007, and as liquidator on 5 December 2007. 3 The payments were accordingly made during the period of six months commencing on 8 May 2007 and ending on 8 November 2007. 4 The Commissioner in turn seeks statutory indemnity under s 588FGA of the Act from the respondent, Mr Issa, for the amount of $70,414.16 which represents amounts paid by the company to the Commissioner and applied by the Commissioner to the tax obligations of the company under Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 (Cth) as follows:

16 May 2007 $11,000.00 22 May 2007 $15,511.18 12 June 2007 $ 4,039.98 5 July 2007 $16,598.94 12 July 2007 $20,000.00 7 August 2007 $ 3,264.06

5 Mr Issa was appointed a director of the company on 5 June 2006 and remained a director at all material times thereafter. 6 Under s 588FF(1)(a) of the Act where, on the application of a company's liquidator the Court is satisfied that a transaction of the company is voidable because of s 588FE, the Court may make 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. 7 Relevantly, for present purposes, under s 588FE(2) of the Act a voidable transaction is one which is "an insolvent transaction of the company" and which was entered into during the six months ending on the relation-back day. In this case the relation-back day is by virtue of s 9 read with s 513C of the Act, the date of the administration, that is 8 November 2007. To be captured by the provisions the transactions in this case must have been entered into, as I have said, on or after 8 May 2007 and at a time when the company was insolvent or deemed to be. 8 Relevantly, for present purposes, under s 588FC of the Act a transaction of a company is only an insolvent transaction if it is "an unfair preference given by the company" and the transaction is entered into when the company is insolvent (or is deemed to be) or the company becomes insolvent by entering into it. 9 Under s 95A(1) of the Act 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. 10 Under s 95A(2) of the Act a person who is not solvent is insolvent. 11 Under s 588E(3) of the Act if a company has been wound up and it is proved that it was insolvent at a particular time during the 12 months ending on the relation-back day it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day. 12 Under s 588FA of the Act the transaction is an unfair preference given by a company to a creditor of the company if, and only if, the company and the creditor are parties to it and the transaction results in the creditor, in respect of an unsecured debt that the company owes to the creditor, receiving more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company. 13 Sections 588FGA(1) and (2) of the Act provide that if the Court makes an order under s 588FF against the Commissioner because of the payment of an amount in respect of a liability under certain specified provisions of the Income Tax Assessment Act 1936 (Cth) or the Taxation Administration Act 1953 (Cth), each person who was a director of a company when the payment was made, is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. 14 It is not in issue in these proceedings that each of the payments which is sought to be impeached was made in discharge of the Company's liability of one of the specified taxation enactments. 15 Section 588FGA(4) of the Act provides that the Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable to the person under s 588FGA(2), that is, the Court may in the same proceedings order a director who is liable to indemnify the Commissioner to pay the Commissioner. 16 Section 588FGB provides defences for a director. 17 Sections 588FGB (3) and (4) provide that: (3) It is a defence if it is proved that, at the payment time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it made the payment. (4) Without limiting the generality of subsection (3), it is a defence if it is proved that, at the payment time, the person: (a) had reasonable grounds to believe, and did believe: (i) that a competent and reliable person ( the other person ) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and (ii) that the other person was fulfilling that responsibility; and (b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it made the payment. 18 Whether a company is insolvent at a particular point of time is a question of fact. The conclusion of insolvency must be derived from a proper consideration of the company's financial position in its entirety, based on commercial reality: Powell v Fryer (2001) 37 ACSR 589 at [75]. 19 The predominant test is a cash flow one although the state of a company's balance sheet is still relevant: Melbase Corporation Pty Ltd v Segenhoe Ltd 17 ACSR 187; Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87. 20 As Lindgren J said in Melbase Corporation Pty Ltd v Segenhoe Ltd at 198: "The words 'as and when they become due and payable' make it clear that although the issue of a prima facie insolvency must be determined as at a particular time, the determination calls for a degree of 'forward looking'."

21 In Powell v Fryer at [75], Olsson J made the point that it is the inability, utilising such resources as are available through the use of assets which may otherwise realistically be raised, to meet debts as they fall due, which indicates insolvency. 22 The Commissioner has not consented to judgment but does not dispute any element of the plaintiffs' claim. Accordingly the Commissioner does not dispute that the company was at the relevant times insolvent or that each payment resulted in an unfair preference as contemplated by s 588FA of the Act. There is also no doubt that the Commissioner and the company were parties to the transactions concerned. 23 Mr Issa did not concede insolvency and in addition he raised the statutory defences under ss 588FGB(3) and (4) of the Act. Mr Issa relied on four affidavits: his own sworn 3 May 2009; an affidavit of Brian Lloyd, an accountant, sworn 2 May 2009; an affidavit of Melissa Francis Altman of 3 May 2009, who was the bookkeeper of the company from March 2005 to September 2007 (but who was on maternity leave from November 2006 and returned to work three days a week in March 2007); and Merna Catherine Taouk of 4 May 2009, who was employed as an office manager from March 2005 until September 2007. 24 As to insolvency, the plaintiffs relied principally on the affidavit of the liquidator dated 31 October 2008, to which was exhibited an insolvency report dated 4 June 2008 in which the liquidator expressed the opinion that the company was insolvent from some time before, and continued to be insolvent after, the relevant date, being 8 May 2007. 25 The liquidator's evidence was not challenged either by the Commissioner or by Mr Issa. He was not cross-examined. His evidence establishes that the company had a deficiency in working capital as at 30 June 2006, 30 June 2007 and 8 November 2007; a deficiency in net assets as at 30 June 2006 ($77,602), 30 June 2007 ($267,637) and 8 November 2007 ($468,497). The company incurred trading losses for the years ended 30 June 2005, 30 June 2006 ($74,923) and 30 June 2007 ($191,039) and had accumulated losses of $265,964 as at 30 June 2007. 26 The company did not produce financial statements for the years ended 30 June 2005, 30 June 2006 and 30 June 2007 until November 2007, although Mr Issa's evidence was that he did produce from time to time, and timeously, business affairs statements for the purposes of taxation compliance. 27 The Commissioner relied on an affidavit of an officer employed in the Australian Taxation Office (ATO), Gail Matthews, sworn 9 January 2009. She produced tax office records showing that from late 2005 the company from time to time was making part payments of its liabilities under the PAYG withholding provisions (commonly referred to as ITW withholding) and under the group tax provisions. 28 The evidence revealed that on 4 September 2006 an officer of the ATO spoke to Mr Issa about outstanding taxes and lodgements and that Mr Issa said he could not commit totally to paying an amount then owed by 15 January 2007 because the company's ability to pay depended on its debtors paying the company what was owed. The document records that the company had defaulted on three payment arrangements since December 2005. 29 It further records that the tax office agreed that as legal action could not be instigated over the "Xmas" period the ATO had agreed for an interim arrangement to be entered into with a payment of $2,000 being made on 8 December 2006. 30 As at 8 November 2007 the company owed the Commissioner $210,975 in tax, owed the Office of State Revenue $124,013 in respect of payroll tax, owed the Australian Taxation Office $45,925 in respect of outstanding superannuation charge and owed $6,961 to its superannuation fund. 31 Mr Issa's evidence was that the company found itself in difficulty principally because it had to pay its creditors promptly and its debtors were paying it late. His evidence was that as at 30 June 2006 the company had rendered invoices of $1.3 million of which only $1.212 million had been paid. The financial accounts showed expenses of $1.287 million and therefore a net loss of $74,923. Mr Issa's point was that had the company's customers paid it timeously it would have in fact made a profit for that financial year of some $12,000. 32 As to 2007, Mr Issa's evidence was that the company had rendered invoices totalling $1.6 million but had only been paid $1.480 million against expenses of $1.672. The financial accounts showed a loss of $191,039, which would, had the company's customers paid, been reduced to approximately $72,000 (or $60,000 if the assumed profit of $12,000 for the previous year were to be taken into account). 33 His submission was that he had reasonable grounds to expect and did expect that the company was solvent at those times and would remain solvent even if it made the payments. 34 The affidavits of Merna Taouk, Melissa Altman, Mr Lloyd and Mr Issa showed that the company had significant difficulties in producing relevant financial information and reports throughout the relevant period. Amongst others Merna Taouk said this: "MYOB/Excel were the primary programs we used to manage the staffing booking side, invoicing, payroll and purchasing records. Due to the great volume of data these systems became more time consuming. As a result of this we were unable to generate accurate staffing reports such as staff on-costs (Superannuation, PAYG, Workers Comp, Public Liability). In order to make the booking of staff, timesheets, payroll and invoice processing more efficient B&B invested in a staffing software called "Work Desk". Often Mr Issa would request reports regarding the P&L, Superannuation, Workers Comp unfortunately we were not able to access this information effectively."

35 Mr Lloyd says that on or about the first two weeks of August he had a meeting with Mr Issa together with Melissa Altman and Merna Taouk. During that meeting he said: "If you continue running the business with this business plan and structure [ paying out employees weekly but collecting money from relevant debtors every 60 to 90 days ] the company will end up trading insolvent." 36 Mr Lloyd says that this was the first time that he had been able to look at the Company's position. The reason was that they had changed accounting systems and they had been unable to get any reliable information from the new system. 37 "Reasonable grounds" to expect requires more than a mere hope or possibility: Tourprint International Pty Ltd (in liquidation & Another) v Bott (1999) 32 ACSR 201. 38 The test requires the director subjectively to have that expectation and for the expectation to be reasonably based. 39 The director's conduct is to be judged not only on what he knew but on what he ought to have known: Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722 at 731. 40 It was undoubtedly the case that at all times from May 2007 the company was insolvent as being unable to pay all its debts as and when they fell due. Mr Issa's own evidence establishes this, leaving aside the compelling and unchallenged evidence of the liquidator. 41 Counsel for the Commissioner, Mr Jay, accepted (in my view somewhat generously) that one might accept that Mr Issa had the subjective expectation that the company was solvent (his affidavit evidence did not in fact say this) but put that if he had such an expectation he did not have reasonable grounds for it. He submitted that the company was not able to generate an accurate financial picture at any time, that there were tax liabilities which were in continuing default, that by July 2007 significant debts had been accumulated, that no financial accounts were prepared until after the administrator was appointed, that at best Mr Issa did not know what the position was, that tax returns had not been lodged for the years to 30 June 2006 and 30 June 2007, that the evidence did not establish that steps were taken by Mr Issa to inform himself as to the company's financial position and that at no stage prior to November 2007 did the evidence establish that there was sufficient information for Mr Issa to inform himself of the financial position of the company. 42 Those submissions are well founded. In my view the evidence fell far short of Mr Issa establishing that there were any reasonable grounds for him to expect that the company was solvent at the times concerned. What the evidence established was that the company was rendering accounts and having difficulty in obtaining payment from its debtors, whereas it was paying its creditors, as it had to, currently. 43 The financial records of the company were in an unacceptable state. 44 Originally the company operated using MYOB/Excel. According to Merna Taouk, as I have said before, they were unable to generate accurate staffing reports such as staff on costs, superannuation, PAYG, workers' compensation, and public liability. They then changed over to Work Desk software and often Mr Issa would request reports regarding the profit and loss, superannuation, and workers' compensation, but unfortunately they were not able to access this information effectively. 45 In all these circumstances Mr Issa has failed, and failed by some distance, to discharge the onus resting upon him that he had reasonable grounds to expect that the company was solvent at the relevant times and would remain solvent even if it made the payments concerned. 46 I then turn to the second statutory defence. That requires Mr Issa to establish that he had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing to him adequate information about whether the company was solvent and that the other person was fulfilling that responsibility. 47 This defence was pleaded as follows: "At all material times the cross defendant relied upon advice and reports provided by: (a) Melissa Altman, Merna Taouk and Ms Day - internal company financial reports prepared by them as employees of the second plaintiff; and (b) Brian Lloyd, external accountant for the second plaintiff." 48 Far from showing that Mr Issa had reasonable grounds to believe that those persons were providing him with adequate information about whether the company was solvent and were fulfilling their responsibility to do so, the evidence establishes that they were not providing him with such information because the company's financial record keeping was not operating, or at least not operating adequately. 49 Mr Lloyd's evidence established that the first time he was able to look at the company's position was in August of 2007 for that reason. The evidence also established that Mr Issa did not realise it; he had been concentrating on existing clients, getting new clients and developing income streams for the company and he thought Melissa Altman was looking after that side of things. 50 In all these circumstances Mr Issa has failed to establish the requirements for the statutory defences and, accordingly, the Commissioner is entitled to be indemnified by him in respect of the amounts which the Commissioner has appropriated to the tax liabilities, which are the subject of the relevant statutory provisions. 51 There will accordingly be judgment for the plaintiffs against the defendant Commissioner in the amount of $126,152.99 and there will be judgment in favour of the Commissioner against the respondent, Mr Issa, in the amount of $70,414.16. 52 The parties should bring in short minutes of order to reflect the outcome of these reasons.

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