Neil Robert Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation

CATCHWORDS : CORPORATIONS - INSOLVENCY - UNFAIR PREFERENCE - whether reasonable person in ATO's position would have had grounds for suspecting insolvency - Proper interpretation of s588FG(2)(b) Corporations Act - whether test under s588FG(2)(b)(ii) is subjective or objective - Whether test under s588FG(2)(b)(ii) includes a duty to inquire - significance of various factors including late payments, preparedness to pay higher rate of interest, and false explanations for cash flow difficulties. Bankruptcy Act 1924 LEGISLATION CITED : Bankruptcy Act 1966 Corporations Act 2001 D'Aloia v FCT (2003) 203 ALR 609 Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 Downey v Aira Pty Ltd (1996) 14 ACLC 1068 Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 Lanpac International Pty Ltd v Automation House Pty Ltd [1998] VSC 9 Mann v Sangria Pty Ltd (2001) 38 ACSR 307 CASES CITED : Olifent v Workcover Corporation (SA) (1996) 185 FLR 423 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 Re S & N (Nominees) Pty Ltd (In liq) (1986) 84 FLR 463 Re Whitgift Nominees Pty Ltd (in liq) (1983) 7 ACLR 680 Sands and McDougall (Wholesale) Pty Ltd (in liq) v Commissioner of Taxation (1996) 22 ACSR 383 Sheahan (liquidator) & Magill Constructions Holding Pty Ltd (in liq) v Workers Rehabilitation and Compensation Corporation (1991) 56 SASR 193 Sims v Celcast Pty Ltd (1998) 71 SASR 142 Smith v Deputy Commissioner of Taxation (1997) 75 FCR 339 PARTIES : Neil Robert Cussen as Liquidator of Akai Pty Ltd (in Liq) & Anor Commissioner of Taxation FILE NUMBER(S) : CA 40891/03 COUNSEL : Mr N Cotman SC / Mr G Lucarelli (Appellants) Mr M Aldridge SC / Mr P Radionoff (Respondent) SOLICITORS : Minter Ellison (Appellants) Emma Whan, Australian Government Solicitors (Respondent)

LOWER COURT Supreme Court JURISDICTION : LOWER COURT 2036/2001 FILE NUMBER(S) : LOWER COURT Palmer J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40891/03

SPIGELMAN CJ HANDLEY JA TOBIAS JA

Friday 22 October 2004 Neil Robert CUSSEN as LIQUIDATOR of AKAI PTY LTD (In Liq) & ANOR v COMMISSIONER OF TAXATION

Akai approached the ATO in August 1998 seeking an extension of time to make sales tax payments, citing a temporary liquidity problem. The ATO granted Akai an extension. Akai continued to make such requests for a period of just over a year. Akai and the ATO negotiated a timetable for deferred payments, which was substantially complied with. By 3 September 1999 Akai had paid all its arrears of sales tax in full together with interest and imposed penalties. The relation back period commenced on 22 September 1999. Eight payments of sales tax were made after that date. Of the eight payments, five were made on the due dates without any request for an extension of time, two were paid on the agreed extension date and the third was paid a day late. The Appellant submitted that given the information known to the ATO, and in the context of Akai's history of late payment, the ATO had reasonable grounds to suspect insolvency at the time of the alleged preference payments. Alternatively, the appellant submitted that such knowledge, together with information the ATO should have acquired, had that effect.

The words "a reasonable person in the person's circumstances" in S588FG(b)(ii) require an objective "reasonable business person" test to be applied and do not require the court to take into account the acumen, perspicacity and resources of the particular creditor. [31], [125], [126].

Queensland Bacon v Rees (1966) 115 CLR 266 considered; Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543; Sims v Celcast Pty Ltd (1998) 71 SASR 142 and Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 affirmed.

On the facts of this case there were no factors which, either alone or cumulatively, constituted reasonable grounds for suspicion of insolvency:

i) Failure to make sales tax payments on their due date indicated a cash flow problem, not insolvency. [40], [125], [126].

Queensland Bacon v Rees (1966) 115 CLR 266 applied.

ii) In some cases actual payments will not be sufficient to countervail indicators of insolvency. However, in this case, the subsequent payment by Akai of all outstanding sales tax suggested that any temporary cash flow difficulties had been overcome. [49], [125], [126].

Queensland Bacon v Rees (1966) 115 CLR 266 applied.

iii) Preparedness to pay a higher rate of interest is an indicator of financial stress, which may be of weight in a particular case. However, it may only indicate a temporary cash flow problem. [55], [125], [126].

iv) A decrease in monthly sale figures and the fact that proceeds from the sale of real estate were paid to a bank did not give rise to a suspicion of insolvency. [58], [59], [61], [125], [126].

v) It is significant if a debtor experiencing cash flow difficulties gives an explanation that is false or does not make sense, it is significant. However, in this case, such weight as this factor was entitled to receive was overcome by Akai's subsequent course of payment. [69], [125], [126].

vi) Akai's tax returns were of no significance. [82], [83], [125], [126].

The information deemed to be available to "a reasonable person in the persons' circumstances" under s588FG(b)(ii) is the information that was actually known by the creditor at the time of the alleged preference payment. It does not include information that the creditor would have known if the creditor had made reasonable inquiries. Where reasonable inquiries have not been made a "reasonable person in the person's circumstances" would know that inquiries that could or should have been made have not been made but would not know the hypothetical result of such hypothetical inquiries. [114] - [123], [125], [126].

Queensland Bacon v Rees (1966) 115 CLR 266; Downey v Aira Pty Ltd (1996) 14 ACLC 1068; Mann v Sangria Pty Ltd (2001) 38 ACSR 307; Sands and McDougall (Wholesale) Pty Ltd (in liq) v Commissioner of Taxation (1996) 22 ACSR 383; D'Aloia v FCT (2003) 203 ALR 609; Smith v Deputy Commissioner of Taxation (1992) 75 FCR 339; Dean-Willcocks (2004) 45 ACSR 564; Re Whitgift Nominees Pty Ltd (in liq) (1983) 7 ACLR 680; Re S & N (Nominees) Pty Ltd (in liq) (1986) 84 FLR 463 considered; Sheahan & Magill Constructions Holdings Pty Ltd (in liq) v Workers Rehabilitation and Compensation Corporation (1991) 56 SASR 193 at 201 ; Sims v Celcast (1998) 71 SASR 142 applied .

Appeal dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40891/03

SPIGELMAN CJ HANDLEY JA TOBIAS JA

Friday 22 October 2004 Neil Robert CUSSEN as LIQUIDATOR of AKAI PTY LTD (In Liq) & ANOR v COMMISSIONER OF TAXATION

JUDGMENT 1 SPIGELMAN CJ: The First Appellant is the liquidator of the Second Appellant, Akai Pty Ltd ("Akai"). He was appointed on 13 April 2000. Akai had made eight payments of sales tax to the Respondent ("ATO") between 5 October 1999 and 21 March 2000 in a total amount of $8,185,525.12. In proceedings in the Equity Division of this Court, Mr Cussen sought orders setting aside these payments on the basis that they were unfair preferences within the meaning of s588FA of the Corporations Act 2001 (Cth) ("the Act"), insolvent transactions within the meaning of s588FC and/or voidable transactions within the meaning of s588FE. Palmer J dismissed the Appellants' application. 2 Before Palmer J, and in this Court, the Respondent did not dispute that Akai was insolvent at the time of the sales tax payments. Nor did it dispute that the payments were unfair preferences within the meaning of s588FA and, accordingly, an insolvent transaction within s588FC. On this basis the Court's powers to make orders, including repayment, under s588FF of the Act was established. (See Sands & McDougall Wholesale Pty Ltd (In liq) v Commissioner of Taxation (Cth) (1999) 1 VR 489 at [36]-[37], [50].) 3 The issue before Palmer J, and in this Court, was whether or not the Respondent discharged its onus of proving the defence under s588FG(2), 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 director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction." 4 Section 95A provides: "(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." 5 No issue arises as to the requirements of s588FG(2)(a) and (c). Section 588FG(2)(c) was not in issue by reason of the succeeding subsections of s588FG which provide: "(3) For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to pay tax, the discharge is valuable consideration provided: (a) by the person to whom the tax is payable; and (b) under any transaction that consists of, or involves, the payment or application. (4) In subsection (3): tax means tax (however described) payable under a law of the Commonwealth or of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates. (5) For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to the Commonwealth, or to the Commissioner of Taxation, that arose under or because of an Act of which the Commissioner has the general administration, the discharge is valuable consideration provided by the Commonwealth, or by the Commissioner, as the case requires, under any transaction that consists of, or involves, the payment or application." 6 The focus of attention before Palmer J, and in this Court, was on subs (2)(b). The Appellants appeal on the basis that his Honour misconstrued or misapplied s588FG(2)(b)(i) or, alternatively, (ii) of the Act. (It is convenient to refer to the subparagraphs hereafter as (b)(i) and (b)(ii).) 7 For a period of just over a year prior to the first of the disputed payments, Akai was experiencing difficulties meeting its sales tax obligations. The Appellants' principal submission in this Court was that the knowledge acquired by the Respondent during the period when sales tax payments were delayed was such as to disentitle it from establishing a defence under s588FG(2). Alternatively, it submits that such knowledge, together with information it should have acquired, has that effect. 8 The relevant relation back period commenced on 22 September 1999. Mr Cussen, the liquidator, seeks repayment of the sales tax payments made after that date. 9 The Appellant alleges that eight such payments were preferences: · The first alleged preference payment of $1,137,812.92 was paid on 5 October 1999 and constituted the payment of the balance of sales tax for the month of August due on 21 September. It was paid one day later than agreed. · The second alleged preference payment of $1,078,604.50 was paid on 21 October 1999 and constituted payment of sales tax for the month of September in full and on time. · The third and fourth alleged preference payments of $655,715.93 and $655,715.93 paid on 18 November and 10 December are for sales tax for the month of October. The first of which being 50% of the total, was in fact paid a few days early and the second, being the other 50%, was a few weeks late, but in accordance with agreement with the ATO. · The fifth alleged preference payment of $1,696,893.31 paid on 21 December 1999 was payment of sales tax for the month of November in full and on time. · The sixth alleged preference payment of $1,332,526.44 paid on 21 January 2000 was payment of sales tax for the month of December was paid in full and on time. · The seventh alleged preference payment of $874,931.44 paid on 22 February 2000 was sales tax for the month of January and was paid in full, one day late. · The eighth alleged preference payment of $753,324.65 paid on 21 March 2000 was sales tax for the month of February and was paid in full and on time. 10 This appeal turns on what the ATO knew or ought to have known about the financial position of Akai at the time of each of the alleged preference payments. If the ATO, or a reasonable person in its circumstances, did not have reasonable grounds for suspecting insolvency at the time of the first alleged preference, this appeal must be dismissed. As will appear, everything that happened thereafter strengthened the appearance of solvency.

Factual Background 11 Palmer J made a number of findings of fact in the course of dealing with particular submissions of the Appellants. I will set out these findings when considering the respective issues below. His Honour also summarised the effect of the evidence, for purposes of the application of a reasonable suspicion of insolvency test, in the following way: "[61] As at 5 October 1999, the date of the first of the impugned payments, the whole of the picture which presented itself to the ATO might be summarised thus: - Akai, a long established, substantial trading company with no previous history of sales tax default, had approached the ATO in August 1998, saying that it had a temporary liquidity difficulty and sought extensions of time to make sales tax payments not yet due; - between August 1998 and October 1999 Akai had substantially complied with its obligations to make payments in accordance with agreed timetables; - the poor sales figures for April and July 1999 seemed to be anomalous - May, June, August and September sales tax figures seemed generally in line with sales tax figures for February and March 1999; - Akai's expectation that it would be able to trade out of its liquidity difficulties by a combination of selling its premises and more profitable trading seemed to be justified: by 3 September 1999 all arrears of sales tax had been paid in full; - on 8 September 1999 Akai had explained that the sales tax rate reduction in July was still having an effect on its receipts collections and sought and obtained an extension for payment of the August sales tax. The first agreed instalment of the August sales tax was in fact paid five days earlier than the stipulated date, suggesting that Akai had been truthful and realistic in seeking the extension of time for payment and that its expectations were being fulfilled; - the payment shown in the ATO's records as having been made on 5 October was due on the previous day. In the light of the previous history, the delay was insignificant. For all one knows, the payment may have been made on 4 October but processed only on the following day." 12 The Appellant challenges these and other findings of fact. As will appear below, in my opinion, his Honour's findings were correct.

The Interpretation of s588FG(2)(b) 13 The submissions in this Court raised a number of matters involving the proper interpretation of s588FG(2)(b). Some are not material to the resolution of the appeal. It is convenient to consider one of these submissions in the context in which it arises. 14 One matter can be disposed of at the outset. Palmer J said in his judgment: "[52] Mr Cotman SC, who appears with Mr Lucarelli for the liquidator, does not submit that the ATO through the officers concerned in the matter, had an actual suspicion of insolvency at the time that the impugned payments were received; he submits that the ATO fails in its defence only under section 588FG(2)(b)(ii): T124.43-126.58." 15 On the appeal the Appellants submit that his Honour incorrectly regarded the passage in the transcript to which he referred as a "concession" with respect to (b)(i). The word "concession" is not used by his Honour. 16 Whether or not there was a "concession" with respect to (b)(i) is of no account. The Appellants submissions concede that, in the event, his Honour did in fact apply what they contend to be the correct test under (b)(i). His Honour, it is submitted, did so by applying the test which the Appellant submits is the correct test for (b)(i) to (b)(ii); namely the "average business person test". His Honour found the test satisfied. If he was correct in that conclusion, it does not matter whether he erred in his reference to the wrong subparagraph, if it be wrong. 17 Mr N Cotman SC, who appeared for the Appellants, submitted that Palmer J applied an incorrect test with respect to the requirements of s588FG(2)(b)(ii). The relevant passage of his Honour's judgment is: "[64] Mr Cotman's submission is that, because of its internal policy on collection of tax debts, the ATO is in a special position which sets it apart from other creditors for the purpose of a defence under s.588FG(2)(b)(ii). I do not think that this submission is supported by the authorities. As has been emphasised by Austin J in Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564, at 572 (paras.33-35), the objective test imposed by s.588FG(2)(b)(ii) does not require an examination whether the particular creditor, acting reasonably, would have had reasonable grounds for suspecting insolvency, with the consequence that if the creditor happens to be a bank (or a tax collecting authority) one asks whether a reasonable bank (or a reasonable tax collecting authority) would reasonably have had such a suspicion. Rather, whether or not the creditor would have reasonably had a suspicion is determined according to the presumed perception of " the ordinary person on the Bondi bus ": per Young J in Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543, at 545-6. That pithy phrase simply denotes that an objective test is to be applied and the standard measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the 'average business person', but certainly not the skills and experience of an expert financial analyst or someone with legal training or any other kind of tertiary education: ibid." 18 Mr Cotman submitted that the differentiation between (b)(i) and (ii) lay in the words "in the person's circumstances" where appearing in the latter. In each case an identical question was posed: Are there reasonable grounds for suspecting insolvency? However, he submitted, the respective subparagraphs answer this question from different perspectives: (b)(i) at a general level, (b)(ii) at a level commensurate with the particular "circumstances" of the creditor. He submitted that subs (b)(i) contained an entirely objective test, i.e. that when assessed objectively, the creditor had no reasonable grounds for suspecting insolvency. He submitted that the "average business person" test is applicable only to (b)(i). 19 Mr Cotman submitted that (b)(ii), by expressly drawing attention to the particular creditor's "circumstances", is a "tailored objective test" and that the "average business person" test is not applicable. With respect to (b)(ii) the particular acumen, perspicacity, investigative resources, and ability to 'read the signs' of the particular creditor is part of that creditor's 'circumstances', to which reference must be made when applying (b)(ii). The perspective is the point of view of a hypothetical creditor endowed with the full range of relevant characteristics of the particular creditor, not that of the "average business person". He submitted that, in this regard Williams J erred in Simms v Celcast (1998) 71 SASR 142 at 145. As did Austin J in Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 at [34]-[35]. 20 On Mr Cotman's submissions, the more astute a particular creditor, the greater is its burden under (b)(ii). He submitted that a hypothetical reasonable creditor placed in the position of a large, well resourced and sophisticated institution should be held to a higher standard. The Australian Taxation Office, he submits, should be so held. 21 Prior to 1992, the equivalent provision to (b)(i) and (b)(ii) was found in s95 of the Bankruptcy Act 1924 and then in s122 of the Bankruptcy Act 1966. The Australian Law Reform Commission recommended legislation to cut the link between corporate insolvency and the Bankruptcy Act. It recommended a separate scheme for corporate insolvency. The legislation proposed by the ALRC was in the general form that became s588FG, i.e. turning on insolvency during the relation back period, subject to a defence. (See ALRC General Insolvency Inquiry Discussion Paper No 32, Canberra, August 1987 at 426; ALRC General Insolvency Inquiry Report No 45, Canberra 1988, Vol 1 at [648], Vol 2 at p153 ("The Harmer Report").) 22 The defence recommended by the Harmer Report was that a creditor "had no reason to suspect" that the company was insolvent at the time of the transaction. This formulation - "reason to suspect" - was in the same terms as the prior Bankruptcy Acts sections. However, what was eventually enacted did not use the terminology "reason to suspect", but "reasonable grounds for suspecting". This formulation first appeared in the Public Exposure Draft of the Corporate Law Reform Bill 1992. The accompanying Explanatory Paper contained no suggestion that anything was being changed in this respect (at [1197]-[1203]). 23 The Harmer Report did make a recommendation using the formulation "reasonable grounds for suspecting that a company was unable to pay its debts". This is contained in the section it proposed for the director's duty to avoid insolvent trading. (See D4 in Harmer Report Vol 2 p69.) This provision is now found in s588G(1)(c) of the Act in the form "reasonable grounds for suspecting that the company is insolvent". It appears likely that the drafter of s588FG(2)(b) chose to employ the same language when expressing a cognate concept in a distinct provision. 24 The 1992 Amendments also bifurcated the test into (b)(i) and (b)(ii). Nothing in the Harmer Report suggested anything like that. As far as I am aware, there are no extrinsic materials which assist in determining why (b)(i) and (b)(ii) were adopted in the form they were. (There is no equivalent to (b)(ii) in the parallel director's defence to an allegation of insolvent trading in s588H(2).) 25 Although Queensland Bacon v Rees (1966) 115 CLR 266 was concerned with a defence in the form of a deeming provision qualifying the requirement of "good faith", which words appear separately in s588FG(2)(a), some of the reasoning is clearly directed to the element now expressed in (b)(ii). Indeed that reasoning is probably the origin of the bifurcated statement of the element in s588FG(2)(b). 26 Kitto J said at 303.6: "The notion which 'reason to suspect' expresses in subs (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes …" 27 The formulation "reasonable person in the position of" the creditor or equivalent, is repeated by Kitto J at 305.5, 306.6, 310.9, 311.6, 312.2, 312.7. 28 When the drafter chose the formulation "reasonable grounds for suspecting", in lieu of "reason to suspect", s/he may have thought it desirable to expressly cover the "reasonable person" test adumbrated by Kitto J in Queensland Bacon v Rees, then the seminal judgment on this area of the law. 29 The word "circumstances" can, but does not usually, refer to a characteristic of a person. The word generally refers to an external factor of some kind. The primary meaning in the Macquarie Dictionary is: "a condition, with respect to time, place, manner, agent etc, which accompanies, determines or modifies a fact or event". 30 In Kitto J's references in Queensland Bacon v Rees to "reasonable person in the position" of a creditor, the word "position" has a similar connotation of external factors. Further, it is of some significance that Kitto J also applied a "reasonable business man" or "reasonable man" formulation on a number of occasions, without additional reference to the "position" of that person. (See at 309.5, 310.5.) These references suggest that Kitto J's references to "position" were references to the objective circumstances of the creditor rather than to its particular perspicacity, financial acumen, etc. 31 In my opinion, the "reasonable business man" test adopted by Palmer J on the basis of Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 at 545-546 per Young J and Dean-Willcocks supra at [33]-[35] per Austin J is correct. 32 In any event, as my analysis of the facts below will suggest, even attributing a high level of perspicacity and financial acumen to the ATO would not alter my conclusion on the facts of this case.

Grounds for Suspicion 33 The Appellant's primary submission was that the ATO was in possession of information which constituted grounds for suspicion of insolvency. This, it submits, on the interpretation it advances, mean that (b)(i), as well as (b)(ii), could not be made out. 34 Alternatively, the Appellant submits that a reasonable person in the position of the ATO would have caused inquiries to have been made and that the response to such inquiries would have given such a person reasonable grounds for such suspicion. This means that (b)(ii) could not be made out. 35 With respect to the information known to the ATO, particular reliance was placed on the following factors:

(i) The history of late payment between 21 August 1998 and 3 September 1999, together with the explanations given during this period for Akai's inability to pay.

(ii) The high rate of interest imposed by the ATO on late payments which meant that a request to the ATO should be understood to be a last resort by a debtor unable to arrange finance from normal commercial sources.

(iii) The assurances given to the ATO that the company's difficulties would be cured by increased sales, which did not materialise.

(iv) The assurances given to the ATO that the proceeds from the sale of the real estate would be used to meet the sales tax arrears, but the proceeds were in fact paid to Akai's banker.

(v) A false explanation proffered for the company's cash flow difficulties for July 1999.

(vi) Akai's request for further accommodation on 8 September 1999, even after clearing its liabilities on 3 September. This related to August 1999 sales due for payment on 21 September. This became the first alleged preference of 5 October 1999.

(vii) The company's tax return for the 1996/1997 year was available at all relevant times. The return for the 1997/1998 year was lodged on 30 August 1999 and was accessible thereafter. An issue arises as to whether the ATO's relevant mind should be fixed with knowledge of these returns. 36 The Appellant's alternative case is based on the proposition that a reasonable person in the position of the ATO would have called for further financial information by the latest in August 1999, indeed as early as May 1999. If the information actually available to the ATO was not such as to constitute reasonable grounds for suspicion of insolvency, then the additional information, which would have been available to a "reasonable person", would have done so. Such material encompassed the tax returns available to the ATO, assuming they are not taken into account as actual knowledge, and additional financial information such as, perhaps most relevantly, cash flow forecasts. This submission is based, in part, on the ATO's own internal manual entitled Policy for the Collection of Taxation Debts, July 1999, ("the Policy Manual").

History of Late Payments 37 Until all its arrears of sales tax were paid on 3 September 1999, Akai had not met its sales tax obligations on time over the course of one year. Bearing in mind that sales tax on sales during a month are due and payable on the 21st of the next month, the course of events can be summarised as follows: · Akai commenced requesting extensions of time with respect to the payment of July 1998 sales tax, due on 21 August 1998. The ATO was informed on 11 August that Akai was having difficulty paying its sales tax and requested an extension of time. Late payment, together with payment of the ATO's penalty rate of interest, occurred with respect to payments of sales tax for the months of July, August, November and December 1998. They were paid, in accordance with an agreed extension, a few weeks later than due. · In March 1999 the ATO was informed that Akai had "cash flow difficulties" and the statement was made that Akai will submit sales tax returns but will only "remit moneys as - when able to do." Sales tax returns for the months of February and March were lodged by the due dates of 21 March and 21 April but no cheque was sent, just the returns. There was no arrangement in place for late payment. · The sales tax return for April 1999 due on 21 May 1999 was lodged, but again no cheque was tendered. The sales tax return for April 1999 showed a low level of sales for the month. · In May 1999, following threats by the ATO to serve a statutory demand if no payment was made or formal arrangement entered into, the ATO was informed that Akai has "had financial difficulties over the past 6 months" with sales being down. However, that was expected to change with an increase in sales over the next several months. The confirmatory letter of 13 May referred to "temporary difficulty" which was attributed to "difficulties in securing production and delivery of product … impacting our business performance and liquidity. These problems have been identified and rectified and we are budgeting for increased sales leading up to the year ending March 2000". The ATO was told that full clearance plus late payment penalties was anticipated from the $6.5 million proceeds of sale of Akai's unencumbered head office on 30 June 1999. · As at 21 May, Akai's total sales tax liability including penalties was $3,306,752.65. In accordance with an arrangement for payment of the outstanding amount Akai paid the ATO the sum of $2,000,000 on 1 July and $1,000,000 on 21 July. The balance was due on 30 July. The internal ATO submission recommending the arrangement states "although no financial details were given … the period … is relatively short given the total amount outstanding". · At the end of July the company received further accommodation from the ATO with respect to the outstanding sales tax for the balance of April and for May and June. The need for this extension was explained in terms of the delay in the settlement of the sale of the Akai building. Further instalments were agreed to be paid in the amount of $700,000 on 30 July, $500,000 on 2 August and $1,443,679.16 on 10 August. · The first instalment was paid a day early, the second was paid two days late. With respect to the last of these three instalments Akai sought a further extension. It informed the ATO that it had received the proceeds for sale of its land but that its bank demanded the proceeds. Akai said it had a "cash flow problem and will need an extra month to settle". Akai's written submission suggested that there had been a drop in sales in July due to customers deferring purchases by reason of the tax reduction from 32% to 20%, associated with the introduction of the GST. The ATO was informed that "The cash impact of the drop in sales is that there is not as much cash to collect in August 1999 as expected". Akai proposed a "final" repayment schedule covering the sales tax for the month of July due on 21 August by three payments on 13 August, 23 August and 3 September. Although the terms of the ATO approval of this proposal is somewhat different, nothing turns on that. The proposal was accepted in substance. · As at 3 September 1999 sales tax for the months of February, March, April, May, June and July had all been paid in full together with interest and imposed penalties. 38 In summary: · February 1999 sales tax of $1.194 million was paid 102 days late, incurring penalties of $45,420.75. · March 1999 sales tax of $1.320 million was fully paid 93 days late, incurring penalties of $27,354.80. · April 1999 sales tax of $602,000 was fully paid 69 days late, incurring penalties of $6,905.85. · May 1999 sales tax of $1.194 million was fully paid 53 days late, penalties not specified in the materials. · June 1999 sales tax of $1.176 million was fully paid 44 days late, incurring penalties of $46,579.50. · July 1999 sales tax of $226,107 was paid 13 days late, penalty unknown. 39 It is convenient to note at this stage that there was a clear improving trend. Although the above summary does not set out the proportion of the total paid by instalments and their timing, payment of the full indebtedness which commenced for February at 102 days late, reduced progressively month by month to be only 13 days late for July. 40 As I have noted above, payment of sales tax is due on the 21st day of the month after the sales are made, i.e. a period of from 21-51 or 52 days after the sales. Where, as here, the creditors' terms of payment are longer than that - Akai's were 60-90 days - the obligation to pay sales tax draws on the working capital of the creditor, subject to debtors paying more quickly than required. Failure to make sales tax payments on their due date is an indicator of a cash flow problem. However, it is well established that a cash flow problem can be experienced by a solvent company. 41 In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, the seminal Australian authority on this area of the law, the analogous fact was that the debtors' cheques had been dishonoured on presentation. That was an indication of a liquidity problem of the same general kind as Akai's inability to meet its sales tax liabilities when they fell due in the present case. 42 In Queensland Bacon v Rees, by majority, the High Court concluded that the dishonouring of many of the cheques indicated no more than a liquidity problem which could be temporary and did not constitute "reason to suspect" insolvency. 43 Mr N Cotman SC, submitted that the history of non-payment in the present case, together with other factors, was such as to indicate something more than temporary cash flow difficulties. He submitted that this history was such that, even after the payments of 3 September, the ATO remained on notice that Akai was in financial difficulty. 44 Palmer J gave careful consideration to the course of actual payments and gave considerable weight to the payment of all overdue amounts on 3 September 1999, and to the substantially timely payment of the subsequent six payments alleged to be preferences. These payments were, Mr Cotman submitted, at best an indication of solvency and did not negative the indicators of insolvency. He also submitted that if the fact of payment were entitled to decisive weight, the defence in s588FG(2) would be so readily established as to almost invariably be made out in the case of creditor without actual knowledge of insolvency. This, he submitted, would add little to the requirement of good faith in s588FG(2)(a). 45 Mr Cotman SC submitted that as the ATO had had reason to believe that the company was insolvent over an extended period of time, it should be regarded as remaining in that position on the basis that it was likely that the company was meeting the demands of an insistent creditor in the shape of the ATO at the expense of other creditors. The doubts about the solvency of Akai had not been resolved. The actual payment of 3 September was, it was submitted, dealing with a creditor which Akai "could not afford to take on". 46 Mr M Aldridge SC, who appeared for the ATO, submitted that the facts of the present case never went beyond giving the creditor knowledge of a temporary cash flow problem. Akai told the ATO that it had a problem and indicated how the problem would be overcome. The explanation, he submitted, was plausible and the deferral arrangements were substantially honoured. In such a case the payments made were evidence of solvency and there was no basis for a belief that Akai was preferring the ATO. 47 Mr Aldridge SC placed reliance on the whole course of conduct, including the payments in July 1999, when a total of $3 million dollars was paid to the ATO to clear the deferred February and March debt and as part payment of the April debt. At that stage, he submitted, it would have appeared to the ATO, or to a "reasonable person" in its position, that Akai was serious about paying its debts, and able to do so, substantially in accordance with the arrangement with the ATO. This was reinforced by the full payment on 3 September. 48 With respect to the request for deferral in May 1999, Palmer J made the following findings which were, in my opinion, entirely justified: "[56] As at 13 May, the ATO's experience with Akai would have given the impression of a substantial, responsible trading company, with a long history of paying its sales tax without delay or difficulty, now dealing openly with the ATO in endeavouring to overcome a temporary cash flow difficulty. Akai had approached the ATO in August 1998, before any default in payment of sales tax had occurred. It had given an explanation for its difficulty and had proposed a timetable for deferred payments. It had complied with that timetable in September and October. The timetable for deferred payments in January and February 1999 was also complied with, although a few days late. [57] A timetable for further deferred payments in respect of the sales tax due from March to June had not been proposed by Akai in March 1999, although in its letter of 16 March Akai had advised that it was restructuring its business and intended to realize cash by selling its premises. However, as soon as the ATO, through Mr Harmanis, made an enquiry, Akai's Director of Finance and a sales tax consultant attended a meeting with Messrs Kalina and Harmanis to discuss the matter. At this meeting the Akai representatives gave an explanation of the problems which had caused what they said was a temporary cash flow difficulty. They told the ATO representatives that the problems had been identified and rectified and that Akai was budgeting for increased sales." 49 There will be situations in which actual payment does not countervail indicators of insolvency. That is not, in my opinion, the case here, contrary to the submissions of the Appellants. 50 The conduct of the ATO was not that of an insistent creditor. Requests for deferral were granted, virtually always in accordance with the request made. At no time was there any use of the steps available to place pressure on a debtor, e.g. service of statutory demands. The payments were made without any pressure, other than at the very beginning in May, when failure to pay occurred without an arrangement being in place. The ATO was not in the position of a creditor upon whom the debtor was dependent for supplies. Any enforcement action by the ATO would take considerably longer than the deferrals sought and granted. 51 Just as in Queensland Bacon v Rees, where the court gave weight to the subsequent payment of the cheques which had, at first, been dishonoured, Palmer J was correct to give substantial weight to the course of actual payments by Akai. In [61] as quoted in [11] above, his Honour referred to the payment of 3 September as 'justifying' Akai's expectation that it would be able to trade out of its difficulties. 52 Furthermore, with respect to the payments within the relation back period, Palmer J said: "[73] I am unable to accept Mr Cotman's final submission that the payments made on and after 5 October 1999 should have done nothing to remove any earlier suspicion of insolvency and that the payments were consistent with Akai paying the ATO at the expense of other creditors. [74] In my view, the pattern of payments made by Akai on and from 5 October must be seen in the context of Akai's previous history of payments substantially in accordance with agreed schedules and in the context of the arrears of sales tax having been brought up to date by 3 September. So viewed, the pattern of payments made on and from 5 October would have suggested to an 'average business person' that Akai had indeed been suffering from a temporary liquidity problem and not from insolvency. Of the eight impugned payments, five were made on the due dates (in one case a day later) without any request for an extension of time; of the other three payments, two were paid on the agreed extension date, and the third a day late. In my opinion, as and when each of these payments was received, a reasonable person in the circumstances of the ATO, knowing the prior history of Akai's dealings with the ATO, would reasonably have concluded that Akai was now out of its temporary liquidity difficulty and would have had no suspicion that Akai was insolvent." 53 I agree with his Honour's analysis of the facts in this regard. Up to and including the payment on 3 September, Akai's conduct did not suggest that it had suffered from anything more than cash flow difficulties which had been overcome. That conclusion was reinforced with, if anything, growing certainty, by its conduct over the period that the alleged preference payments were made. 54 On the facts of the present case I am unable to discern any factors which, either alone or cumulatively, constituted grounds for suspicion of insolvency of the weight of the express assertions of difficulty which proved decisive in Sands & McDougall supra esp at [60], [66] or the long course of default and disappointed expectations that was found to exist in Smith v Deputy Commissioner of Taxation (1997) 75 FCR 339 at 361. I turn to consider each of the other matters relied upon in this respect by the Appellants.

Penalty Interest 55 As Mr Cotman SC emphasised, the penalty imposed by the ATO is a high rate of interest. That a company is prepared to pay that rate of interest does indicate that it is unable to arrange finance from normal commercial sources. However, there may be circumstances in which a short term deferral at a higher interest rate is commercially preferable to an alternative, e.g. where the alternative may require renegotiation of existing arrangements, with consequential fees or the need to devote longer periods of executive time. Preparedness to pay a higher rate of interest is an indicator of financial stress which may be of weight in a particular case. However, it may only indicate a temporary cash flow problem.

Fall in Sales 56 Mr Cotman referred to statements made at the 13 May 1999 meeting, confirmed in the subsequent letter, that Akai was budgeting for an increase in sales. He suggested that when, shortly thereafter, the sales tax return for April was lodged that should have been a warning because it showed a further decrease in sales. However, there was nothing to suggest that the budgeted increase was to be immediate. Indeed, Akai had explained to the ATO that it had experienced difficulties in obtaining supplies, which would inevitably be reflected in sales, and which may well have continued in April. 57 Mr Cotman handed up a table derived from Akai's sales tax returns which compared sales net of tax for each month in 1999 with the same month in 1998. That table suggested that the sales were comparable until July 1999, except for the significant fall in April. In July the substantial drop in sales tax rates, associated with the introduction of the GST, led to a deferral of sales. The table shows that sales did not fully recover from the July fall. Nevertheless, the decline in two specific months, the latter fully explicable as temporary, suggests cash flow difficulties not insolvency. 58 I can see no reason why an officer of the ATO should have felt impelled to perform the detailed calculation of sales from the tax returns. After all, by the time it became apparent that sales did not fully recover after July, and were not increasing, Akai had met its deferred obligations on 3 September and was making its sales tax payments with virtually no delay. 59 Palmer J rejected the submissions that the level of sales suggested insolvency, on the facts in the following passage, with which I agree: "[59] Further, the drop in Akai's sales figures for April 1999 - which Mr Kalina agreed would have been 'a fairly alarming piece of information' had it come to his attention - must have lost its significance by August and certainly by 5 October, when the first of the preferential payments was made. Sales tax payable for each of February and March 1999 had been in the order of $1.3 million; sales tax payable for April had been $602,000, which indicated a major downturn in sales in comparison with the previous two months. Yet the sales tax payable for May was about $1.2 million and the sales tax for June was about $1.18 million, suggesting that the sales for April had been a marked anomaly. Sales tax for July was $266,000 but Akai explained in its letter of 9 August that that drop in sales was also an anomaly, being the result of major customers holding off purchasing product in the light of the recently announced cut in the sales tax rate from 32% to 22%. Later figures seemed to prove this explanation correct. Sales tax was about $1.26 million for August, $1.08 million for September, $1.31 million for October, $1.7 million for November, $1.33 million for December, $875,000 for January 2000 (explicable by the Christmas holidays), and $753,000 for February (possibly explicable for the same reason)."

Proceeds from Real Estate Sale 60 Mr Cotman placed reliance on the statements to the effect that the arrears of sales tax would be paid out of the proceeds of the sale of the company's real estate. In the event these funds were paid to a bank. 61 I would not give weight to these statements. A company is entitled to muster the resources available to it in any configuration it wishes. The fact that the settlement monies were paid to a bank does not detract from the positive effect of such a sale on the company's ability to pay its debts as and when they fall due. Its ability to do so may well be enhanced by such a sale. For example, a bank which received a reduction of some part of its finance package from the settlement money may very well agree to extend additional finance by way of overdraft, or otherwise, which it had not been prepared to advance pending the reduction of another component of the total indebtedness of the company to that bank. The company's cash flow would be increased by the valuation in interest payments. 62 Mr Cotman submitted that the fact that the company sought further accommodation from the ATO even after the sales proceeds had been received by the bank was an indicator of insolvency. In reply Mr Aldridge drew the Court's attention to the fact that by two payments of 1 July 1999 and 23 July 1999 Akai reduced its indebtedness by $3 million. Those payments were made before the receipt of funds from the sale. These payments cleared the February and March sales tax debt with penalties and constituted part payment of April 1999 sales tax. These payments did indicate that Akai was not wholly dependent on the sale of the real estate. 63 From March to July 1999, the senior ATO officer dealing with the file was Mr Paul Kalina. The file was then transferred to the Parramatta office where Mr Jeff Blumner took over the file under the supervision of Ms Colette Pepin. 64 The Appellants submit that particular weight ought to have been given to Mr Kalina's evidence as to how he would have reacted to events which occurred after he had ceased to be in charge of Akai's file (obtained during cross-examination). This evidence is said to be important because there is, in effect, no other available evidence from ATO officers. Jeff Blumner has died. Ms Pepin, who supervised Mr Blumner, relied exclusively on Mr Blumner's opinions and had no direct involvement with the file - her evidence, it is submitted, is thus of little use. The Appellant's submission is that "Mr Kalina's reactions and conclusions from the facts known as at the commencement of the relation back period are indicative of what a reasonable person in the respondent's circumstances would have suspected". 65 Mr Cotman SC sought to rely on a statement by Mr Kalina that, having been told that proceeds of sale would be used to reduce the sales tax liability, he would have had a "significant concern" if he had been told that the proceeds would be paid to the bank. 66 In his submissions to this Court, Mr Cotman suggested that his Honour erred by not considering what Mr Kalina's reaction would have been if he had been told this in August 1999. However, the question asked was confined expressly to the May 1999 meeting. It is difficult to see how it could be otherwise. Mr Kalina was not apprised of the full range of information available to the ATO in August 1999. His "concern" could have no relevance to the position at that time. 67 Palmer J rejected this submission as follows: "[58] It is not to the point that Mr Kalina would have had 'significant concerns' had he been told at or about the time of the meeting in May 1999 that Akai's bank wanted to receive a substantial part of the proceeds of sale of the company's premises in reduction of its debt. The ATO was not told of the bank's position until 9 August. However, by that time the availability of cash from the sale of the Homebush premises would not have seemed critical. According to Akai's letter of 9 August, settlement of the sale of the Homebush premises had only recently occurred, but Akai had nevertheless been able to honour its arrangements to pay $2 million on 1 July, $1 million on 21 July, $700,000 on 29 July, and $500,000 on 4 August. It would have seemed, therefore, that the sale of the Homebush premises was not Akai's only available source of funds to pay its debts and that it had other resources available which enabled it to comply with its commitments to make payments to the ATO exceeding $4 million within a space of about five weeks." 68 To these observations, with which I agree, I add that such concern, if any, as may have arisen with respect to the request for further accommodation after sale of the real estate would have dissipated by 3 September when the total amount then owing was paid. This was well before the first alleged preference payment.

False Explanation 69 It is significant if a debtor experiencing cash flow difficulties gives an explanation that is false or does not make any sense. The letter, in which Akai sought a further extension for payment of the balance then owing and for sales tax for the month of July, said: "Akai's cash flow problem arises during the month of July 1999. During this month our customers held off purchasing any product in light of the drop in sales tax rate from 32% to 22% on the 29 July 1999. Akai had budgeted for sales during the calendar month of July to be around $4.3 million. Actual sales achieved were approximately $1.5 million. Cash impact of this drop in sales is that there is not as much cash to collect in August as what was expected." 70 Akai had informed the ATO, and it was accepted as a fact in these proceedings, that Akai's terms of sale were 60 to 90 days. Accordingly, the drop in sales in July would not substantially impact on its cash flow in August. It would do so in September and October. The fact that Akai was expecting to have a cash flow problem in August may have indicated that its cash flow difficulties were not temporary. Such weight as this factor was entitled to receive was overcome by its subsequent conduct in paying the balance on 3 September and meeting all obligations, with minimal delay, thereafter.

Further Request for Deferral 71 Within a week of clearing its debt on 8 September 1999, Akai wrote requesting further accommodation with respect to the August 1999 sales tax liability. It said: "Akai is not able to pay on time because our receipts collectable in the month of September 1999 are unseasonably low. Low collections have resulted because customer demand during the month of July 1999 was low. Customer demand was low in light of 29 July 1999 reduction in the wholesales sales tax rate from 32% to 22%. Akai collects money in 60 day time cycles, which is the industry norm. Hence, we are collecting July 1999 sales in September 1999." 72 The Appellant submitted that a creditor aware of a past history of default and explanation should have had reason for concern on the basis that, notwithstanding the sale of its premises, Akai was still seeking further accommodation at the higher rate of interest attaching to overdue ATO payments. 73 However, on this occasion, the explanation for the cash flow interruption, i.e. that it was caused by the GST related fall in sales in July, was an accurate explanation. Having just cleared a large overdue debt, the minor delay then sought of about two weeks was not significant and was not a material indicator of possible insolvency.

Tax Returns 74 The Appellants relied on the ATO's knowledge of the financial position of Akai pursuant to tax returns filed by it, available by electronic access to the officers in its sales tax enforcement unit referred to in submissions as "the receivables management team". These returns were said to constitute actual knowledge which, together with other information, would constitute "reasonable grounds for suspecting" within (b)(i) or (b)(ii). 75 Akai had an end of March balance date. At all relevant times, any officer of ATO had access to the company's return for the 1996/1997 year. That return showed that the company had current assets of $38,822,638, whilst its current liabilities were $50,242,982. Any officer would also know that the tax return for the financial year 1997/1998 was late, indeed substantially so, and that on 22 July 1999 the ATO had issued a final notice to the company to lodge its income tax return. 76 The 1997/1998 return was lodged on 30 August 1999, and was readily accessible thereafter, relevantly, on the date of each alleged preference payment. The new return showed a similar disproportion in liquidity. As at 30 March 1998 the company's current assets were $40,441,119 and its current liabilities were $54,866,710. It was submitted that cause for concern also arose from the 1997/1998 return as it showed that the company incurred a trading loss of over $3 million in the 1997/1998 year and that accumulated losses were over $10 million, with the consequence that its shareholder funds had been reduced to virtually zero. 77 Mr Cotman SC submitted that the tax returns were readily available and the ATO should be taken to have actual possession of the information therein contained. 78 The Appellants also relied on the Policy Manual in this regard. There are a number of references in the Policy Manual to the ability of the ATO to use its information base: "3.3.4 (iv) responsibility for providing relevant information to enable assessment of the risk lies solely with the debtor (although the ATO will also make use of information it has access to or which it has obtained) …" "3.5.1 (vii) evaluating risk is not an isolated task. All relevant facts need to be considered and where appropriate, other ATO areas may need to be (and should be) consulted when appropriate." "10.5.3 (i) matters the Commissioner will take into consideration include … information that may be held (or obtained) by the Commissioner." 79 Mr Aldridge SC submitted that the separate units of the ATO should be regarded as distinct. He submitted that the relevant information was confined to that available to the receivables management team. This was the narrative available on screen to any such officer and which contained the statement of Akai's account, including a summary of all correspondence and file notes. Alternatively, he submitted that by the time the 1998 return became available there was no need to look at it because the problem was over. It became available on 30 August and on 3 September the back taxes were paid. 80 Palmer J dealt with this issue as follows: "[67] I am unable to accept Mr Cotman's submission that a reasonable person in the ATO's position would have had a suspicion of insolvency in October 1999 because of the contents of Akai's tax return for the financial year ended 30 March 1998. [68] First, none of the relevant ATO officers dealing with Akai's sales tax payments actually became aware of the contents of Akai's March 1998 tax return. Tax returns were received and dealt with by an entirely separate department within the ATO. There is no evidence that officers in the tax return department were under a duty to pass information routinely to officers in the sales tax collection team or vice versa. The ATO officers in the sales tax collection team were entitled to obtain access to Akai's tax return but failure to make that investigation does not, in my opinion, put the officers on constructive notice of what they would have discovered had they made enquiry. So to hold would be to construe s.588FG(2)(b)(ii) as operating on the assumption that 'the average reasonable business person' routinely makes his or her own enquiries into a debtor's financial position from all available sources before agreeing to extend time for the payment of a debt, and agrees to the extension only if the enquiry demonstrates solvency. In my view, such an assumption is unrealistic and unreasonable. [69] Second, even if the ATO officers had called up the March 1998 tax return on or about 5 October 1999, it would have told them little of value about Akai's financial position some eighteen months after the balance date. On its own, it would not have shown that Akai was insolvent in March 1998, let alone as at 5 October 1999. As Mason P has pointed out in Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office (2002) 42 ACSR 501, at 513, 'it is clear law that the statutory test of solvency looks at matters on a "cash flow" basis rather than a simple "balance sheet" basis'. Accordingly, against the picture presented by the tax return as at 30 March 1998, the ATO officers would have had to contrast Akai's subsequent ability to bring its sales tax arrears up to date by 4 September 1999 and its successful record of meeting its obligations under the various agreements for deferred payment, including its ability to pay some $4 million in sales tax in a five week period in July and August 1999. The March 1998 tax return would have told the ATO nothing about how Akai had managed to bring sales tax arrears up to date and what its cash flow position was as at 5 October 1999." 81 Whether the ATO should be taken to have "grounds for suspecting" on the basis of information available to, but not accessed in the normal course, by a particular subunit of a large organisation raises some difficult issues. It is not, however, necessary to resolve any such issue here. 82 The 1996/97 tax return was of no significance. It did show a substantial excess of current liabilities over current assets. However, what is "current" in each respect extends over a range of such width that it is at best only suggestive of the possibility of a cash flow problem. No problem of any kind emerged for some time after the balance date of 31 March 1997, and when it did emerge, as noted above, it was handled in a manner that suggested it was a temporary problem. 83 The 1997/98 return indicated that the imbalance between current liabilities and assets had increased at 30 March 1998. The excess of current liabilities over current assets was significantly more than the fixed asset to be sold (the real estate was valued at $6.5 million). This did suggest that cash flow difficulties were likely to be experienced. This was not distinctively different to what was openly acknowledged by Akai in the period after May 1999. Although the financial information was over a year old by May 1999, if available at that time it may well have put the request for delay in paying the next few months sales tax in a different light. However, the return only became available on 30 August 1999. By then payments had been made to reduce the debt over a number of months and, within three days, the overdue balance had been cleared. Thereafter the creditor's obligations were met in a timely way. 84 Palmer J was correct to reject the Appellants' submissions in this regard.

Further Inquiries 85 As I have noted, the Appellants relied on the Policy Manual to support the proposition that a reasonable person in the ATO's circumstances would have sought further financial information. The Manual, it was submitted, required ATO officers to obtain all information necessary to enable an informed risk assessment to be undertaken. 86 If such information had been sought, the Appellants submitted, Akai's insolvency would have been obvious. Furthermore, as the ATO bore the onus of proof, it had to establish that the information provided in response to such a request would not have suggested insolvency, and it had not done so. 87 Mr Cotman SC submitted that a reasonable person in the position of the ATO would have called for additional financial information in May 1999 or, at least, by August 1999. The deficiency in the knowledge of the ATO, if any, it was submitted, would not have existed if the ATO had acted as a "reasonable person" in its circumstances would have acted. Accordingly, such a person "would have had" reasonable grounds for suspecting insolvency within (b)(ii). 88 An example of such financial information is a cash flow statement. The ATO had in its possession cash flow statements for past periods. Clearly a company like Akai would have such projections. The ATO did not call for any such documents. A reasonable person in the ATO's circumstances would have done so, Mr Cotman submitted. 89 Mr Aldridge SC submitted that the (b)(ii) test requires a snapshot to be taken at the time that the disputed payment is made. He submitted that "a reasonable person … in the circumstances" of the relevant creditor may be aware that, in the past, an inquiry, such as a request for financial information could, or even should, have been made. However, such a person should not be treated as being in possession of information in reply to such a request. It cannot be known what the reply would have been. It is not, he submitted, permissible to take into account the result of a hypothetical inquiry. 90 Applying a test of 'reasonable person in the ATO's circumstances' to the Commissioner of Taxation is an unenviable task. The Commissioner is not an ordinary creditor. In particular, unlike the usual creditor, the Commissioner does not have a commercial relationship with the debtor pursuant to which s/he has given consideration in exchange for the obligation to pay. The Commissioner is deemed to have satisfied the condition of valuable consideration in s588FG(2)(c) by s588FG(5). 91 The ATO's position is analogous to that of a commercial actor who has performed the entirety of one part of a contract, for which it will be paid in instalments. The creditor's only interest is ensuring receipt of a future stream of payments. There is no ongoing commercial relationship and, therefore, there is no capacity to ensure payment by threatening future supply. Nevertheless, a prudent creditor would still be concerned to know whether the debtor is solvent because the amount the creditor eventually receives could be diminished if the debtor continues to trade whilst insolvent. 92 Similarly, the deferral of a tax debt may enable the taxpayer to continue to trade, with the result that the ATO will receive less than it would if, for example, a liquidator were appointed immediately. The ability to collect its debts is the primary concern of the Policy Manual on which the Appellants relied. 93 The Policy Manual is concerned with the collection of taxation debts. The primary focus of the Manual is on minimising the risk that the ATO may not be able to collect a revenue debt. Some aspects of the Manual refer to the need to acquire information for purposes of risk assessment, including where an application is made to pay tax later than the due date. 94 With respect to payment by instalments, the Manual states: "10.4.4 The Commissioner accepts that some tax debtors may occasionally experience cash flow difficulties that will prevent them from paying their debt on time. In those isolated instances, the Commissioner will consider any request from debtors to accept payment of the debt by instalments over a period of time. Accepting payment of an overdue amount by instalments provides the Commissioner with an alternative to more formal recovery procedures." 95 Furthermore, the Manual states: 10.5.3 Matters the Commissioner will take into consideration when deciding whether to agree to accept payment by instalments and/or to defer legal recovery action include:- (i) the information provided by the debtor and other information that may be held (or obtained) by the Commissioner; (ii) the circumstances that led to the inability to pay and the effect of requiring immediate payment; (iii) the current financial position, including other current payment obligations and actions taken by the debtor to rearrange finances or borrow to meet the debt; (iv) the stage legal recovery action has reached and the grounds put forward by the debtor to justify deferring legal action; (v) the offer made and the ability to meet payments of the debt (and the additional charges for late payment imposed by legislation) on those terms without seriously impacting on the ability to meet other obligations; (vi) whether there is a likely risk to the revenue by accepting payment by instalments and whether that risk could be overcome by seeking some form of security for the debt from the debtor; (vii) the solvency of the debtor and arrangements made with other creditors (arm's length or otherwise) to pay debts; …

(Additional matters are listed.) 10.5.4 The Commissioner will not accept payment by instalments if his prospects of recovery in the longer term would be diminished or the revenue would be disadvantaged. If there is insufficient information to enable the Commissioner to make a decision, debtors will be advised the offer is unacceptable and formal action to recover the debt will be instituted or will continue. 10.5.5 Where the Commissioner has concerns about the solvency of debtors or the ability of debtors to meet the terms proposed, he may either seek an independent review from an insolvency practitioner or require debtors to provide adequate security or a surety." 96 The Manual contains a series of chapters dealing with alternative mechanisms of debt collection. It indicates on a number of occasions that the ATO may pursue bankruptcy or liquidation, but that is treated as a last resort. 97 The Policy Manual is not entirely consistent on the issue of provision of further information. One clause states that taxpayers applying to pay by instalments "must provide all necessary information" (10.6.1). Another states that any such application "should contain" both "a detailed statement of the debtors current financial position" and also "sufficient information to satisfy the Commissioner that payment can be made" (10.5.2) A third states that the Commissioner will take into account "the current financial position" of the debtor (10.5.3). A discretionary element is introduced by one clause which states "The Commissioner may require … a proposal to be supported by written details of the debtors current financial position" (10.4.6). 98 The contents of the Policy Manual indicate, perhaps as a counsel of perfection, that a creditor in the position of the ATO may require a debtor to provide financial information in order to protect itself. The primary concern manifest in the Manual is whether accommodation given to the debtor will aggravate the situation by making it less likely that an existing debt will be paid. 99 The issue that has arisen is whether the (b)(ii) test can be applied so that information which a "reasonable person" would have sought, but the particular creditor did not seek, can be included in the matter to which regard is had to determine whether such a person would have had "reasonable grounds for suspecting" insolvency. 100 The Appellants' submissions raise an important aspect of the (b)(ii) test. Do the words "would have had" refer to a past course of conduct in which a "reasonable person", in the creditor's "circumstances", would have engaged? Alternatively, are those words limited, as the ATO submits, to what such a "reasonable person" would have concluded on the basis of the information in fact available to the particular creditor? If the latter, then the only relevant fact a "reasonable person" would know is that inquiries that could or even should have been made, had not been made. 101 From time to time difficulties have been expressed with respect to the distinction between (b)(i) and (b)(ii). (See, e.g. Downey v Aira Pty Ltd (1996) 14 ACLC 1068 at 1076; Mann v Sangria Pty Ltd (2001) 38 ACSR 307 at [46]; Sands and McDougall (Wholesale) Pty Ltd (in liq) v Commissioner of Taxation (1996) 22 ACSR 383 at 406; Sims v Celcast Pty Ltd (1998) 71 SASR 142 at 144-45; D'Aloia v FCT (2003) 203 ALR 609 at [18]; Smith v Deputy Commissioner of Taxation (1992) 75 FCR 339 at 349-350; Sands & McDougall supra [1999] 1 VR 489 at [52]-[54].) These authorities seek to identify what, if any, work there is for (b)(ii) to do, that is not already performed by (b)(i). As the requirements of (b)(i) and (b)(ii) must both be satisfied before the defence is made out, it will rarely be necessary to classify a consideration under one or the other. (See Sands & McDougall supra at [67].) 102 The proposition advanced in these proceedings would establish a significant difference between (b)(i) and (b)(ii). The reference in (b)(i) to "had no reasonable grounds" cannot readily be construed to extend to the results of further inquiries. The reference in (b)(ii) to "would have had no such grounds" could so extend. The issue that arises is whether, on the proper construction of (b)(ii), it does. 103 I should note that it cannot be said that unless an interpretation such as that for which the Appellants contend is adopted, there would be no separate work for (b)(ii) to do. (See Sims v Celcast supra at 145-146.) 104 In Queensland Bacon v Rees the appellants had made various inquiries after the cheques had been dishonoured and had, as a result, received information and assurances which were, for the most part, sufficient. 105 Barwick CJ made observations with respect to the need to make inquiry about the dishonouring of the cheques: "That the dishonour calls for inquiry and probably some action is undoubted and, in some circumstances, it may provide ground for suspicion of insolvency." [at 293.4 per Barwick CJ] " … the issue by a trader … of a cheque which is not certain to be honoured by his bank is so damaging a step that its issue and dishonour suggests immediately a desperate situation; and in any case calls for some inquiry on the part of the creditor." [295.10-296.1 per Barwick CJ] 106 I note that Barwick CJ referred only to the fact that inquiry was called for. His Honour did not suggest that a suspicion of insolvency could arise because of a hypothetical response to a hypothetical inquiry. 107 Kitto J made no observations about further inquiry. His Honour assessed the actual inquiries made by the respective creditors and focused attention only on the information actually known to each. 108 In Dean-Willcocks supra, Austin J indicated that the (b)(ii) test may treat the absence of inquiries as a material factor. His Honour was dealing with an objection to the admissibility of certain expert reports. With respect to that part of the report which proceeded on the basis that the information actually contained in the creditor's files was the only pertinent information, his Honour said at [37]: "This fails to take into account the question whether a reasonable person in the bank's circumstances would have obtained information of the kind outlined. The author's reasoning seems to assume that the bank was protected because it did not seek this additional information. I think it would be wrong to assume as they appear to do, that a reasonable person in the bank's circumstances would never be expected to make further inquiries and collect additional information on the matters they list, before it could be said that he or she had no reasonable grounds for suspecting insolvency." 109 In Dean-Willcocks the issue arose in a tangential way. The issue has been fully argued in the present case. 110 Other than the observations of Barwick CJ in Queensland Bacon v Rees and those of Austin J in Dean-Willcocks, the court was not referred to any authority on the element of further inquiries in the application of the (b)(ii) test. There are, however, three first instance judgments under s122(4)(c) of the Bankruptcy Act 1966 - where the relevant test was "knew or had reason to suspect", with respect to the "good faith" element - which relied in part on what should have been known to a creditor. 111 In Re Whitgift Nominees Pty Ltd (in liq) (1983) 7 ACLR 680 at 686, it was said that the creditor ought to have known of the publication of judgments and proceedings in a journal which, according to the evidence, reported on 95% of the businesses in Queensland. In Sheahan & Magill Constructions Holdings Pty Ltd (in liq) v Workers Rehabilitation and Compensation Corporation (1991) 56 SASR 193 at 201, a creditor was taken to have notice of an application to wind up a company published in the South Australian Government Gazette. In Re S & N (Nominees) Pty Ltd (In liq) (1986) 84 FLR 463, a method of payment treated as unusual was such as to call for inquiry and, quoting Kitto J in Queensland Bacon v Rees, "the mind of a reasonable person in the position of a payee" was "the mind of a person who has eschewed inquiry" (474). A reasonable person in this position would have "reason to suspect" insolvency on the basis, it appears, that it knew there had been no inquiry, not on the basis of the results of a hypothetical inquiry. 112 On the other hand, other cases have refused to take into account information that had not been sought by the creditor. (See Olifent v Workcover Corporation (SA) (1996) 135 FLR 423 at 436; Lanpac International Pty Ltd v Automation House Pty Ltd [1998] VSC 9 at [50].) 113 The reasoning in Re S & N (Nominees) may be applied to explain the reasoning in Re Whitgift Nominees and Sheahan & Magill Constructions. A reasonable person in, to use the (b)(ii) formulation, the creditor's "circumstances", would know that there had been no inquiries. In my opinion, it is not permissible to go further and to act on the basis of what such inquiries would or may have revealed. 114 There is no difficulty with the proposition that a "reasonable person" in the circumstances of a particular creditor must be assumed to have the full range of information actually available to that creditor. That would include knowledge of the fact that some things were not known because no request for additional information had been made. In my opinion, however, this does not encompass information which is not in fact available but which a "reasonable person" would have sought and, presumably, received. 115 A number of features of the statutory regime in Pt 5.7 of the Act are pertinent to determining this issue of statutory construction. 116 First, in the relevant range of voidable transactions, the subject transaction must be "an insolvent transaction" (s588FE (2)-(5)). By s588FC the company must be insolvent at the time the transaction is entered into, or when an act or omission occurs to give effect to it. 117 If, as the Appellants contend, the information available to a "reasonable person" encompasses the results of hypothetical inquiries, there would be very limited, if any, scope for the defence. In any situation in which a company is in fact insolvent, there is always a level of detail of financial information available to the company which will betray its true financial position. If a creditor is obliged to make inquiries and, therefore, a "reasonable person" in its circumstances is taken to have done so, an honest response will usually, perhaps always, contain suspicion if not proof of insolvency. It is most unlikely that Parliament intended the defence to be virtually unavailable. 118 The second aspect of the statutory scheme that is relevant to the determination of this issue is its focus on the point of time when the particular transaction occurs. Section 588FG(2)(b) commences with the words "at the time when a person became" a party to the transaction, relevantly a payment. (See definition of "transaction" in s9 of the Act, par (d).) 119 Time is of critical significance in the scheme. Relevantly, a transaction is only a "voidable transaction" within s588FG(2) with respect to which a court may make orders under s588FR subject to the defence provided by s588FG(2)(b), if an insolvent transaction was entered into, or an act was done to give effect to it, during the six months ending on the relation back day. (Other time periods apply in different circumstances.) 120 It is, in my opinion, inconsistent with the focus on the date on which, relevantly, each alleged preference payment was made, to take into account what a "reasonable person" would have done prior to that date. A "reasonable person in the (creditor's) circumstances" refers to the actual circumstances as they exist on the date that the creditor entered into the transaction alleged to be a preference. 121 Thirdly, I repeat that the extrinsic materials do not indicate any reason for the adoption of the "reasonable person" test in (b)(ii), in what I have described as the bifurcated provision. This very silence, coming after a long period of public consultation and inquiry by the Australian Law Reform Commission and the Government, strongly suggests that no dramatic change was intended. Nothing in Queensland Bacon v Rees, including the references to inquiry by Barwick CJ, suggest that the pre-existing law put a creditor in the position it would have been in, if it had conducted all reasonable inquiries. 122 For the above reasons, the words "would have had" in (b)(ii) should be construed as the "reasonable person's" assessment of information in fact in the possession of the creditor, into whose "circumstances" the reasonable business man is theoretically placed. 123 It may well be that a failure to make inquiries will, in some cases, be of considerable significance when determining the good faith element of the defence under s588FG(2)(a). It may also be the case that the absence of information, including the failure of the debtor to proffer such, will be of significance in determining whether a reasonable person would have had reasonable grounds for suspicion under (b)(ii). There was no such suggestion in this case. The Appellants' submissions that the ATO should be taken to have additional financial information about Akai should be rejected. It is therefore not necessary to consider Mr Aldridge's submission that the Court should not speculate about a hypothetical reply to a hypothetical inquiry.

Conclusion 124 The appeal should be dismissed with costs. 125 HANDLEY JA: I agree with Spigelman CJ. 126 TOBIAS JA: I agree with Spigelman CJ.

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