Otto Australia Pty Ltd v Commissioner of Taxation - [1995] FCA 20 - FCA 1995 case summary — Zoe

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Otto Australia Pty Ltd v Commissioner of Taxation

[1995] FCA 20

Federal Court of Australia|1995-02-03|Before: Lindgren J

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Source facts

Court

Federal Court of Australia

Decision date

1995-02-03

Before

Lindgren J

Source

Original judgment source is linked above.

Judgment (45 paragraphs)

[1]

CATCHWORDS CORPORATIONS - Statutory demand - application under s 459H or alternatively s 459J of the Corporations Law to set aside statutory demand - statutory demand for additional tax and penalties for late payment of sales tax and group tax - whether genuine dispute as to amount of sales tax liability - whether offsetting claim for refund of sales tax overpaid - relevance of the solvency of a company applying to set aside a statutory demand - whether statutory demand for two or more debts required to "specify" the individual debts and their amounts - whether "defect" in statutory demand - whether defect causing "substantial injustice" to company. TAXATION - sales tax - overpayment by company of sales tax - determination of true amount of liability to sales tax - whether entitlement to refund of amount overpaid - additional tax and penalties for late payment of sales tax and group tax - dispute as to the amount of the additional tax and penalty for late payment of sales tax - whether entitlement to refund where sales tax "passed on" by wholesaler.

[2]

Corporations Law ss 459E, 459H, 459J and 459S Sales Tax Assessment Act (No 1) 1930 s 26 Sales Tax Assessment Act 1992 ss 16, 51 and 55 Income Tax Assessment Act 1936 sub-s 221F (12) Otto Australia Pty Ltd v Commissioner of Taxation (1991) 28 FCR 477 Re Aroora Pty Ltd (1993) 27 ATR 473 Altarama Ltd v Camp (1980) 5 ACLR 513 Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347 Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd (1989) 1 ACSR 118 L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1992) 7 ACLR 180 CHIPPENDALE PRINTING CO PTY LIMITED v DEPUTY COMMISSIONER OF TAXATION No NG 3388 of 1994 Lindgren J Sydney 3 February 1995

[11]

NATURE OF PROCEEDINGS By its application filed on 8 August 1994, the applicant ("Chippendale") seeks an order under s 459H, alternatively s 459J, of the Corporations Law ("the Law") setting aside a creditor's statutory demand for payment of debt. The statutory demand was dated 19 July 1994 and was served on Chippendale on 21 July 1994. The creditor was the respondent ("the Commissioner"). The demand was in the prescribed form, Form 509H, as required by para 459E (2) (e) of the Law and Chippendale did not suggest that it was not a "statutory demand" as defined in s 9 of the Law. The amount referred to in the statutory demand was $194,472.68. A copy of the schedule to the demand is annexure "A" to these Reasons. As can be seen, the amount of $194,472.68 was made up of: (1) additional tax for late payment of sales tax payable (a) prior to 1 January 1993 under the former regime contained in "the Sales Tax Assessment Acts" ($86,443.98); and (b) from 1 January 1993 under the new "Streamlined Sales Tax Law" found in the Sales Tax Assessment Act 1992 ("the 1992 Act") ($5,646.72); and (2) penalties for late remission of amounts required to be deducted for the purpose of Division 2 of Part VI of the Income Tax Assessment Act 1936 ("ITAA") from employees' salaries or wages and remitted to the Commissioner ($102,381.98) ("group tax"). A major part of Chippendale's case was its claim that it had paid substantially more sales tax than the amounts for which it was liable, that it was entitled to recover from the Commissioner the amounts of the overpayments and that these totalled more than the amount of the statutory demand. Chippendale contends that according to which of two formulae is the appropriate one by reference to which its liability should have been calculated, it overpaid in the 1992, 1993 and 1994 financial years amounts totalling either $423,383.00 or $480,929.00, and is entitled to a refund in one or other of those amounts. It contends, additionally or in the alternative, that it did not incur liability to pay additional tax on those amounts paid which it was not, in fact, liable to pay.

[19]

CHIPPENDALE'S CASE OF OVERPAYMENT OF SALES TAX AND ENTITLEMENT TO A REFUND IN GENERAL Chippendale is a manufacturer and retailer of printed material but not a wholesaler. The broad aim of sales tax legislation is to tax the last wholesale sale of goods. Usually this is the sale from the last wholesaler to a retailer. In Chippendale's case, there is no sale by wholesale. Chippendale has been paying sales tax calculated on an amount calculated by Chippendale as its retail selling price minus 7.5% thereof. Edwin Murrell Gardiner ("Mr Gardiner"), the managing director of Chippendale, deposed in an affidavit sworn on 30 November 1994 that this practice arose from a conversation which he had in around December 1990 with someone from either the Australian Taxation Office or the Printing and Allied Trades Employers Federation, when he was told that printers such as Chippendale were required to calculate sales tax on that basis. He said that since approximately January 1991 Chippendale has calculated its liability on that basis (except in respect of its clients considered to be "print brokers" - these are not presently relevant). According to the same affidavit Mr Gardiner had recently become aware from Chippendale's sales tax consultants, Wesolowski & Crane, ("W & C") and solicitors, Cowley Hearne, that with effect from 1 January 1993 a Sales Tax Ruling has allowed Chippendale to calculate its sales tax liability by reference to a notional wholesale selling price calculated as its manufacturing cost plus one third of the difference between that amount and its retail selling price (excluding tax) (see below for an account of Sales Tax Ruling SST 2 ("SST 2")). By the same affidavit Mr Gardiner deposed that he had recently become aware from the same sources that prior to 1 January 1993, as an alternative to calculating its sales tax liability on its tax exclusive retail selling price less 7.5% thereof, Chippendale had been entitled to calculate its sales tax liability on the "notional wholesale value" of its goods (see below for an account of Sales Tax Ruling New Series 3001 ("ST(NS) 3001") from which this information was clearly derived). He said that if the "manufacturing cost plus one third difference" formula were to be applied in respect of all of the years ended 30 June 1992, 30 June 1993 and 30 June 1994, Chippendale's liability for sales tax would have been $423,383.00 less than the amount which it paid. Copies of Chippendale's financial statements for those years and calculations by W & C supporting this contention were in evidence. The Commissioner had written to W & C expressing agreement with W & C's "methodology" in applying the SST 2 formula. As noted above, SST 2 applied with effect only under the Streamlined Sales Tax Law which came into operation on 1 January 1993. But prior to that date, printers who did not make wholesale sales were not confined to a calculation based on retail selling price less 7.5% either. In a letter dated 21 November 1994 from the Australian Taxation Office to W & C the Commissioner expressed the opinion that prior to 1 January 1993 the methods of calculation of the notional wholesale selling price available to printers who did not make wholesale sales were: "(1) The tax exclusive retail selling price less 7.5% provided this results in an amount greater than cost of manufacture, and (2) a wholesale value which includes all manufacturing costs, direct and indirect, a value for administration and selling costs at the wholesale stage, and a wholesale profit margin."

[21]

There was evidence from Mr Gardiner and from John Leopold Wesolowski of W & C supporting a conclusion that if Chippendale's sales tax liability had been calculated on the basis of "wholesale value" for 1992, 1993 and 1994, it would have paid less sales tax to the extent of $480,929.00. According to Mr Gardiner the figures showed that the "wholesale value" was appropriately fixed at a level of "total retail sales less 20% thereof". Christopher Lance Baynes, who has been engaged in the printing industry for six years and who is currently a director of another printing company, gave evidence that (i) a dedicated wholesaler could not operate a viable business if it acquired goods at a price equal to Chippendale's tax exclusive retail selling price less only 7.5% thereof and on-sold them to retailers at that tax exclusive selling price; (ii) a dedicated wholesaler would need, in order to make any profit, a margin of approximately 17.5% rather than 7.5%; and (iii) the level of Chippendale's retail selling price was within the range being charged and paid in the market. On 30 November 1994 Chippendale made a formal application for a refund of sales tax, stating the amount claimed as being either $423,383.00 or $480,929.00. In support, it annexed copies of the affidavits filed in these proceedings. SALES TAX ASSESSMENT ACTS Prior to the beginning of the Streamlined Sales Tax Legislation on 1 January 1993, liability to sales tax was governed by numerous Acts, the Sales Tax Assessment Act (No 1) 1930 ("the No 1 Act") being that of present relevance. In sub-s 3 (1) of the No 1 Act, "manufacturer" is defined to include a "printer". Sub-section 17 (1) provided that the sales tax imposed by the No 1 Act was to be levied and paid upon the "sale value" of goods manufactured in Australia by a tax-payer and sold by him. Section 19 provided, relevantly, that sales tax was to be paid by the manufacturer of goods manufactured in Australia and sold by him. Sub-section 18 (1) provided relevantly that the sale value of goods for the purposes of the No 1 Act was, if the goods were sold by retail, "the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale". Accordingly, Chippendale was liable to pay sales tax levied upon no greater amount than the amount for which the goods could reasonably be expected to have been sold by it by wholesale. Refundability was provided for relevantly in sub-ss 26 (1) and (1A) of the No 1 Act. Those provisions were as follows: "26(1)Subject to sub-section (1A), where the Commissioner finds in any case that tax has been overpaid by a person, the Commissioner shall-- (a) refund the amount of any tax overpaid; or

[25]

STREAMLINED SALES TAX LAW The Streamlined Sales Tax Law is found in a number of Acts of which that of present concern is the 1992 Act. Sub-section 16 (1) of the 1992 Act provides that Table 1 in Schedule 1 to the Act sets out all the "assessable dealings" that can be subject to sales tax. In the definition section, s 5, "assessable dealing" is defined to mean any dealing covered by Table 1. Table 1 gives as one of the assessable dealings "retail sale by a person who manufactured the goods in the course of any business". The "seller" is referred to as the person liable to pay sales tax on such a dealing. The "normal taxable value" in respect of such a dealing is stated to be "the notional wholesale selling price". Sub-section 16 (2) makes assessable dealings taxable dealings and makes the seller liable to pay. Sub-section 16 (3) makes the amount of tax payable a function of the taxable value of a taxable dealing. Accordingly, Chippendale is liable under the 1992 Act to pay sales tax calculated by reference to an amount no greater than the "notional wholesale selling price" of the goods manufactured and sold by it. Sub-section 51 (1) of the 1992 Act provides that Table 3 sets out the situations in which a claimant is entitled to a credit. (Sub-section 51 (3) provides for a limitation period in respect of the entitlement to refund but this is not presently relevant.) Item CR 1 in Table 3 of Schedule 3 provides, in effect that a claimant is entitled to a credit where the claimant has paid an amount as tax that was not legally payable, in which case the amount of the credit to which the claimant is entitled is "the amount overpaid, to the extent that the claimant has not passed it on" (emphasis supplied). SST 2 (referred to earlier) is entitled "TAXABLE VALUES UNDER THE STREAMLINED SALES TAX". It explains the principles for determining the taxable value of goods under the Streamlined Sales Tax Law. Paragraph 3.16 defines "notional wholesale selling price" in the following terms: "3.16 The notional wholesale selling price means the price (excluding sales tax) for which the tax payer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction. In principle, this notional price should reflect a value which includes the manufacturing cost, the expenses which would be associated with the wholesaling of the goods, plus an appropriate wholesale margin".

[26]

There follow paragraphs setting out some guidelines intended to simplify the calculation of notional wholesale selling price. Paragraphs 3.20-3.22 appear under the heading "Where no similar goods are sold by wholesale". Paragraph 3.20 is as follows: "3.20 In practice a manufacturer who only sells particular goods by retail may have difficulty deciding either the apportionment of expenses or the wholesale margin for the calculation described in 3.16 [quoted above]. In this case, the Taxation Office will accept a notional wholesale selling price calculated on the basis of: . manufacturing cost, PLUS . one third of the difference between that amount and the retail selling price (excluding tax). This method of calculation may be used by a manufacturer in any industry where that manufacturer does not sell similar goods by wholesale." According to a footnote to the expression "manufacturing cost" in paragraph 3.16, that expression is a reference to the cost of manufacturing the goods calculated on the basis of the "full absorption costing method" dealt with in Income Tax Ruling IT 2350 ("IT 2350"). IT 2350 dated 31 July 1986 deals with the absorption method (as distinct from the cost price method) of ascertaining the cost of trading stock on hand at the end of a year in a manufacturing business. This involves a determination of the cost of an article of trading stock manufactured by a tax payer. IT 2350 says that this requires that three elements be taken into account: material costs (the cost of materials used to manufacture the particular article); direct labour costs (the cost of labour used directly in the manufacturing operations); and production overhead costs (all production costs other than material and direct labour costs) (para 7 of IT 2350). Paragraph 11 of IT 2350 prescribes the production overhead costs to be taken into account in respect of manufacturing businesses generally, when the cost of manufactured trading stock is to be determined. There was evidence that W & C had calculated "manufacturing costs" for the purposes of paras 3.16 and 3.20 of SST 2 and of Chippendale's application in conformity with IT 2350. Section 55 of the 1992 Act provides as follows: "55.If the claimant has claimed a credit to which the claimant is entitled, the Commissioner must apply the credit as follows ( ... ): (a) the Commissioner may apply the credit against any liability that the claimant has under the sales tax law or under any other Act of which the Commissioner has the general administration; (b) the Commissioner must refund any excess to the claimant."

[31]

SUBMISSIONS AND REASONS I do not find it necessary to deal with all submissions made, although I will note them all.

Extent of Chippendale's liability for sales tax - sub-s 26 (1A) of the No 1 Act and sub-s 51 (1) of, and Item CR1 in Table 3 to Schedule 1 to the 1992 Act. Chippendale referred me to three "Vale Press" cases in this Court decided on para 18 (1) (b) of the No 1 Act, namely, Boxvale Holdings Pty Limited v FC of T 89 ATC 4927 (FCA/Wilcox J), Vale Press Pty Ltd v FC of T 34 FCR 238 (FCA/FC) and Vale Press Pty Ltd v FC of T (1994) 124 ALR 210 (FCA/Hill J). These three cases dealt with the statutory definition of the expression, the "sale value of the goods", as (relevantly) "... the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale". Chippendale's purpose in referring me to these cases was to support its submission that, notwithstanding difficulty which might be encountered in the application of it, the linguistic formula by which the relevant tax base was defined possessed an objective meaning which was certain (as distinct from being arbitrary and incontestable), and therefore placed an effective limit on the amount of Chippendale's liability. Not surprisingly, the Commissioner did not submit to the contrary. The Commissioner submitted that until Chippendale refunded the sales tax to its customers, it was not entitled to a refund and so there could be no offsetting claim. Under the No 1 Act, the relevant provision is sub-s 26 (1A) and under the 1992 Act it is Item CR1 in Table 3 of Schedule 3 to that Act, both noted earlier. That Chippendale passed on to its clients the sales tax paid by it and has not yet refunded it to them is established by para 35 of Mr Gardiner's affidavit sworn 30 November 1994 which was as follows: "35.Once the Deputy Commissioner for Taxation has determined whether the Applicant is entitled to a refund, the period over which that entitlement arises and the exact amount of refund due to the Applicant, the Applicant will pass these refunds on to its clients." The equivalent provision to sub-s 26 (1A) of the No 1 Act in Sales Tax Assessment Act (No. 5) 1930 ("Act No 5") was sub-s 11 (1A) of the latter. That provision was considered by the Full Court of this Court in Otto Australia Pty Ltd v Commissioner of Taxation (1991) 28 FCR 477. Sheppard J (at 480-481) regarded sub-s (1A) as fatal to an argument that sub-s 11 (1) (which was in identical terms to sub-s 26 (1) of the No 1 Act) entitled the taxpayer to a refund, once it was conceded, as it was in that case, that the price charged by the taxpayer for the goods was computed by reference to costs which included sales tax, even though this had not been passed on in an identifiable form. Burchett J agreed with Sheppard J and described sub-s 11 (1A) as providing "an insuperable obstacle to the appellant's success" (at 483). The third member of the Court, Beaumont J, did not consider the question whether the tax had been "passed on" within the meaning of sub-s 11 (1A) of Act No 5. The trial judge, Lockhart J, had expressed the same view as Sheppard and Burchett JJ did (see (1990) 25 FCR 257 at 263-264). I can see no answer to the mandatory nature of these provisions. The obligations otherwise incumbent on the Commissioner to refund amounts of sales tax overpaid have no application because Chippendale passed on the sales tax to its customers. For this reason I do not think that Chippendale has an offsetting claim for the purposes of s 459H of the Law. It is a separate question, however, whether there is a genuine dispute between Chippendale and the Commissioner about the existence or amount of a debt to which the statutory demand relates. Under sub-s 29 (1) of the Act No 1 Act, whether "additional tax is due and payable by way of penalty" depends on tax remaining unpaid "after the time when it became due and payable". Similarly, under sub-s 68 (1) of the 1992 Act, the "penalty" at the rate of 16% per year depends upon tax "payable by" a person remaining unpaid. Is there a genuine dispute about the existence or amount of any debt for sales tax on which the additional tax or penalty for late payment referred to in the statutory demand has been calculated? The notion of the "genuineness" of a "dispute" for the purposes of s 459H has been much discussed. The standard of satisfaction is not high. It has been variously described. The most recent reported survey of the authorities in this Court of which I am aware is found in my judgment in Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347 at 352-354. The discussion there concluded with the following:

[34]

Penalties for late remission of group tax - Para 459E (5) (a) of the Law and sub-s 221F (12) of the ITAA Chippendale submitted that the Commissioner was not entitled to make a statutory demand relating to the penalty for late remission of "group tax". The submission depends upon para 459E (5) (a) and sub-s 459E (6) of the Law and sub-s 221F (12) of the ITAA all noted earlier. Chippendale submitted that the phrase "except subsection 221F (12)" in para 459E (5) (a) had the effect that a statutory demand could not be served in respect of penalties under sub-s 221F (12) for lateness in remission of group tax. In response, the Commissioner submitted that para 459E (5) (a) has a limited role to perform of making it clear that a statutory demand may be made in respect of the provisions of the ITAA specified in sub-s 459E (5) even if the liability arose before commencement of s 459E (the earlier sub-sections of s 459E were inserted by Act No 210 of 1992 with effect from 23 June 1993, and sub-ss (5) and (6) were added by Act No 32 of 1993 with effect from 1 July 1993). The Commissioner submitted that sub-s 459E (5) did not represent "a catalogue of those debts for which demands may be made under this legislation" (Transcript 58.37). The Commissioner referred to Re Aroora Pty Ltd (1993) 27 ATR 473 (Vic/Hayne J) ("Aroora"). That case concerned a statutory demand by the Commissioner for payment of group tax and penalties in respect of failure to remit by the due date. The company submitted that in so far as the demand included an amount for penalties under sub-s 221F (12) of ITAA, it was defective because of para 459E (5) (a). Hayne J observed that the amount claimed was not an estimate but an amount actually due and therefore a liability under s 221F which, by operation of s 221R of the ITAA, was a debt due to the Commonwealth and payable to the Commissioner which could be sued for and recovered by the Commissioner in any court of competent jurisdiction. His Honour held that whatever the explanation might be for the parenthetical exception in para 459E (5) (a), sub-s 459E (6) was to be given its full force and effect. Chippendale submitted that I should not follow Aroora. The terms of sub-s 459E (6) suggest that doubts had been entertained as to whether the liabilities or all the liabilities referred to in the various sections and sub-sections of the ITAA referred to in paras (a) to (e) of sub-s 459E (5) were "debts" for the purposes of sub-s 459E (1). A possible explanation for the exclusion of sub-s 221F (12) which suggests itself from the language of sub-ss 459E (5) and (6) is that those doubts did not extend to the penalties provided for in that sub-section. The background to the introduction of sub-ss 459E (5) and (6) is described in the following terms in the Explanatory Memorandum which accompanied The Insolvency (Tax Priorities) Legislation Amendment Bill 1993 (which became Act No 32 of 1993): "One of the difficulties presently experienced by the Commissioner in the recovery of tax debts is the necessity to ascertain exactly the amounts which are owing by a company before being in a position to issue a statutory demand (Division 2 of Part 5.4 of the Corporations Law introduced by the Corporate Law Reform Bill 1992). To better equip the Commissioner to act quickly for the recovery of tax debts, the proposed amendments will enable the Commissioner to serve a demand on a company for the payment of the liabilities of the company under a remittance provision where the demand specifies the estimate of liability made by the Commissioner even if the liability arose prior to the commencement of the section [new subsection 459E(5)]. Remittance provisions for the purposes of the section are sections 221F, 221G, 221P and subsections 221YHDC(2), 221YHZD(1), 221 YHZD(1A) and 221YN(1) and new section 222AHA of the Assessment Act." (at 47)

[36]

Miscarriage of exercise of discretion on Chippendale's application for remission On 18 August 1994 Chippendale instituted proceedings No NG 522 of 1994 under the Administrative Decisions (Judicial Review) Act 1977 the ("AD(JR)") Act seeking review of the Commissioner's decision not to remit the additional tax under sub-s 29 (2) of the No 1 Act and not to remit the penalties under sub-s 68 (4) of the 1992 Act and sub-ss 221 N (1) and (2) of the ITAA. Chippendale submitted that some or all of the existence of the statutory discretions to remit, the making by Chippendale of the application for remission, the obligation on the Commissioner to consider and deal with that application in accordance with law, and Chippendale's pending application for review under the AD(JR) Act, signified that there was a genuine dispute as to the existence of the debts and/or an offsetting claim. The Commissioner submitted that the Court hearing the AD(JR) proceedings could do no more than decide that the Commissioner's exercise of his discretion had miscarried and remit the matter to the Commissioner, and implicitly submitted that the granting of this form of relief and any present prospect of its being granted do not establish a genuine dispute as to the existence of the debts or an offsetting claim. In my opinion the Commissioner's submission should be accepted. A possibility or even a likelihood that the Court will remit Chippendale's application to the Commissioner to be determined by him in accordance with law does not establish an independent basis for saying that there is a genuine dispute about the existence or amounts of the debts or an offsetting claim for the purposes of sub-s 459H (1) of the Law. On the contrary, the statutory discretions to remit predicate that liability for the additional tax and penalties, as the case may be, has arisen.
Para 459J (1) (b) of the Law - solvency of Chippendale Chippendale submitted that the evidence showed that it was solvent, and that this was made relevant at the stage of an application to set aside a statutory demand by reason of the terms of para 459J (1) (b). Chippendale submitted that the affidavit of Mr Gardiner sworn on 30 November 1994 established its solvency. Annexed to that affidavit was a copy of Chippendale's audited financial statements for the financial year ended 30 June 1994. They showed total sales for the year of $11,624,569.42 and after deduction of sales tax of $1,186,464.26, a "net sales" figure of $10,438,105.16. The "cost of sales" was $6,053,587.73 giving a "gross profit" for the year of $4,384,517.43. After adding on $4,500.00 for other income and deducting expenses (including salaries) of $3,394,274.84, the "operating profit on trading" for the year was $994,742.59. After deducting income tax applicable of $234,773.22, an "operating profit after tax" of $759,969.37 resulted. A figure of $379,901.59 for "unappropriated profits brought forward" gave an amount "available for appropriation" of $1,139,870.96. Out of this a dividend of $244,880.00 was paid leaving an amount of $894,990.96 as "unappropriated profits carried forward" at the end of the financial year. So far as the balance sheet position is concerned, perhaps it suffices to say that Chippendale appears to have had as at 30 June 1994 "net assets" or "total shareholders' equity" of $1,867,140.69. It was not submitted for the Commissioner that Chippendale was insolvent. I accept that there is cogent evidence of its solvency for the purpose of the present application. Two propositions must be distinguished: (1) that solvency is potentially relevant to the issues of "genuine dispute" and "offsetting claim" grounds for setting aside under s 459H and, for that matter, to the grounds for setting aside provided for in sub-s 459J (1); and (2) that solvency, without more, constitutes an "other reason" within para 459J (1) (b) for the setting aside of a statutory demand. Chippendale put both submissions. In my view, the first proposition is to be accepted and the second rejected. It may be easier to conclude that a dispute about a debt or an offsetting claim is "genuine" when raised or made by a solvent company than in other cases (cf Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd (in liq) (1989) 1 ACSR 118 (WA/Ipp J) at 121); Beverage Holdings Pty Ltd v Greater Pacific Investments Pty Ltd (1990) 3 ACSR 743 (WA/FC) at 747 (Wallace J)). Similarly, the solvency of a company is clearly relevant to the "substantial injustice" issue posed by para 459J (1) (a) and may be relevant to an "other reason" for setting aside provided for in para 459J (1) (b). I now turn to the second proposition referred to above. The issue raised is highlighted by assuming an unquestionably solvent company which receives a statutory demand for a debt which it does not dispute and in respect of which it has no offsetting claim: will the demand be set aside if the company can prove that winding up proceedings would inevitably fail? Section 459A of the Law provides that on an application under s 459P, the Court may order that "an insolvent company" be wound up in insolvency. Paragraph 459C (2) (a) provides that for the purposes of such an application, the Court must presume that the company is insolvent if, during the three months ending on the day on which the application is made, the company failed (as defined by s 459F) to comply with a statutory demand. Sub-s 459F (1) provides as follows: "If, as at the end of the period for compliance with a statutory demand, the demand is still in effect and the company has not complied with it, the company is taken to fail to comply with the demand at the end of that period."

[37]

However, sub-s 459C (3) provides that this presumption operates "except so far as the contrary is proved for the purposes of the application". This provision contemplates that a company may prove its solvency for the purposes of the winding-up application against it. The derivation of para 459J (1) (b) calls for consideration. Under s 222 (2) (a) of the Companies Act 1961 (NSW) and s 364 (2) (a) of the Companies Code the expressions "neglected to pay ... " and "failed to pay ... " were used in the description of the conduct which gave rise to the statutory presumption of insolvency. It was held that both expressions connoted non-payment "without reasonable cause" or "with an element of delinquency", and that there was not such a "neglect" or "failure" if there was reasonable cause for non-payment, such as a dispute on substantial grounds as to the existence of the debt or a counter-claim based on substantial grounds for an amount equal to or exceeding the debt the subject of the demand: see, for example, L & D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1992) 7 ACLR 180 (NSW/McLelland J) ("L & D Audio") at 183-184. The construction to which I referred provided a basis for holding that the statutory presumption of insolvency did not arise and ordering that an application for winding up not be filed. The jurisdiction to make such an order was the court's inherent power to prevent an abuse of its own process: Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83 (Vic/McGarvie J) at 87-88; L & D Audio, supra, at 183. In Pacific Communication Rentals Pty Ltd v Walker (1993) 12 ACSR 287 (NSW/Brownie J) ("Pacific Communication") it was held that the inherent jurisdiction to prevent the commencement of winding up proceedings which would constitute an abuse of process has survived the enactment of Pt 5.4 of the Law. A demand was not a court process and so the court's inherent power was not relevant to it. Nor was there express power to set aside a demand. In Altarama Ltd v Camp (1980) 5 ACLR 513 ("Altarama"), McLelland J held that the court lacked jurisdiction to prevent the service of a demand under para 222 (2) (a) of the Companies Act 1961 (NSW). In my view it is clear that the court likewise lacked jurisdiction to set aside a demand served under that provision or under para 364 (2) (a) of the Companies Code. The Australian Law Reform Commission's Discussion Paper No 32 of August 1987 entitled General Insolvency Inquiry (ALRC DP 32) proposed that legislation regulate statutory demands and provide for the setting aside of them (Vol 1, paras 112-118; Vol 2, WU7, WU8, WU11, WU12). The Commission so recommended in its Report No 45 of September 1988 entitled General Insolvency Inquiry (ALRC 45 ("the Harmer Report") Vol 1, paras 144-155, 158, 159; Vol 2, Appendix A, WU7, WU8, WU11-WU13). The Explanatory Memorandum which accompanied the Corporate Reform Bill 1992 generally reflected the recommendations of the Harmer Report. It recorded (in para 688) that the provisions in relation to the setting aside of statutory demands were "intended to be a complete code for the resolution of disputes involving statutory demands" (cf Texel Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACSR 535 (Vic/Hayne J) at 538). Paragraph 114 of ALRC DP 32 proposed that a demand might be set aside if the Court was satisfied that there was a substantial dispute as to whether the debt was owing, that the company appeared to have a counter claim which might exceed the amount of the debt, or that "the Court [was] satisfied, on other grounds, that the demand ought to be set aside" (Vol 2, WU8 (3) (c)), and para 114 continued: "This latter general power would enable the court to take into account matters such as improper or invalid service, mistakes or mis-statements in the notice of demand ... and unreasonable refusal of the creditor to accept an offer of the company to meet the debt."

[40]

The distinction between the "defect in the demand" and "other reason" grounds is found in sub-s 459J (1) of the Law. This appears to have been a matter of drafting convenience to enable the "substantial injustice" qualification to be attached to the "defect in the demand" ground, leaving the residual "other reason" ground, without that limitation, to cover such other matters as had been mentioned, namely, improper or invalid service or an unreasonable refusal of the creditor to accept an offer by the company to meet the debt. The foregoing account of the genesis of para 459J (1) (b) at least makes it clear that solvency alone was never in contemplation as constituting "some other reason" for setting aside a statutory demand. Several considerations support the view that solvency is not intended alone to constitute "some other reason" within para 459J (1) (b) for the setting aside of a statutory demand. Firstly, the proposition that solvency alone could constitute a sufficient reason for an order setting aside a statutory demand militates against the plain terms of sub-s 459E (1) which entitle a creditor to serve such a demand, and the plain terms of para 459C (2) (a) which are intended to afford the creditor the benefit of the presumption of insolvency. If solvency, without more could warrant the setting aside of a demand, no creditor could safely serve one without first investigating the state of solvency of the company, yet this is something which generally is peculiarly within the company's knowledge. Secondly, the Law evinces an intention that the issue of solvency is to be the subject of a final determination in the winding up proceedings (see, for example, ss 459A, 459C (2) (a), (3), 459S) whereas the statutory demand procedure is of a preliminary and adjectival nature. It would be at odds with this scheme to allow the issue of solvency to intrude, otherwise than incidentally as referred to earlier, at the setting aside stage. Thirdly, although there is a prescribed form of demand under the Law and there was none in Altarama, supra, the observations of McLelland J in that case (at 521) in my view are applicable, mutatis mutandis, to the position under the Law: "A demand for payment of an alleged debt, no matter how disputed the debt may be, is not an unlawful act, nor in my opinion can it be said to infringe any right of the alleged debtor. The serving of a demand requiring payment of a sum of money is not a procedure for which it is necessary to find authority in s 222 (2) (a) of the Companies Act or elsewhere. I do not consider that s 222 (2) has any operation except in proceedings for the winding up of the company concerned. The only relevant effect of the sub-section is to give in such proceedings and in particular circumstances a particular evidentiary effect to the neglect to comply with a demand of the kind therein described. The service of a demand is in no sense equivalent to the institution of proceedings in the court and the rationale for restraining the institution or prosecution of such proceedings is not here available."

[42]

Para 459E (2) (b) of the Law - defect in form of statutory demand This ground and the next are related. Chippendale claims to be in a situation which must not be uncommon. A company may not be able to satisfy itself that it is indebted for the full amount claimed. It may seek and obtain further particulars but remain uncertain of its position when the period of the notice expires. Perhaps it would be prudent and make for good administration for a creditor, at least in the case of statutory debts as in this case, to refer in a statutory demand to all the legally essential elements of liability for the amount claimed. In the present case this would have involved, in the case of each of the three Acts, reference to the relevant legislative provision, each amount in respect of which default was made, the date of default, the percentage rate applied and the commencement and end dates of the period for which the calculation of additional tax and penalty was made. After all, if the respective legislative provisions were correctly applied, such calculations must have been carried out by the Commissioner. But does this Law require this? Chippendale submitted that the Law requires that a statutory demand which, like the present one, relates to two or more debts, must specify the individual debts and their amounts as well as the total of those amounts. The Commissioner, on the other hand, pointed to the language of para 459E (2) (b) which, in terms, requires only that such a statutory demand specify "the total of the amounts of the debts". Prima facie, two constructions of paras 459E (2) (a) and (b) are possible. The first is that a demand which relates to two or more debts also relates to single debts and must therefore comply with para (a) in relation to them as well as with para (b). The second is that paras (a) and (b) are mutually exclusive. But even on the latter view, it must be noticed that sub-s 459E (1) authorises, relevantly, the service of a demand "relating to" two or more debts, and that para 459E (2) (b) itself applies only where a demand "relates to" two or more debts. Therefore, it is at least required that the statutory demand appropriately identify the two or more debts to which it "relates". For two reasons I do not find it necessary to choose between the two constructions contended for, or to decide whether appropriate identification of the debts to which a demand relates would always necessitate that the demand "specify" the individual debts and the amounts of them. Firstly, the statutory demand in this case did specify the individual debts and the amounts of them (see Annexure "A" to these Reasons). The word "specify" does not, in my view, require that a demand make explicit the way in which the amount of a debt was arrived at. I digress to note that para 459E (2) (e) requires that a demand be in the prescribed form, and the prescribed form (Form 509H) contains a schedule and footnote as follows: "SCHEDULE Description of the debt (indicate Amount of the debt if it is a judgment debt, giving the name of the court and the date of the order)

*Total Amount

..............................................................*Delete if not applicable."

[45]

COSTS As I indicated at pp 23-24 above, I will not make final orders at this stage. The parties will be directed, by 2.00 pm on 10 February 1995, to exchange submissions and the forms of orders for which they contend and to supply copies to my Associate. The proceedings will be stood over to 9.30 am on 13 February 1995 for oral elaboration on those submissions and the making of final orders. Until the issues raised at pp 23-24 above are dealt with, it is premature to reach a firm view on costs, but some comments can usefully be made now. Both parties have had some success. The Commissioner submitted that any success which the applicant might have is attributable to affidavits filed late. This is so. Chippendale's non compliance with directions for the filing and service of its affidavits was egregious. Until a day or so prior to the hearing on 1 December 1994, Chippendale had filed and served three affidavits comprising six pages. On 29 November, 30 November and 1 December 1994 Chippendale served a further seven affidavits (including expert evidence) comprising 27 pages. Counsel for the Commissioner, no doubt in accordance with instructions, took the commendably responsible stance that while the reading of these late affidavits was objected to on the ground of, inter alia, their lateness, it was in everyone's interest that the case proceed on the day set aside for it. If Chippendale's late affidavits had been filed and served within the time fixed by the Court's directions, the Commissioner, with time to study them carefully and seek advice as to their effect on the case, may well have accepted that there was a genuine dispute as to Chippendale's liability to pay the additional tax and penalty in respect of late payment of sales tax. Moreover, if the Commissioner had sought an adjournment of the hearing in order to have time to consider, be advised upon, and if so advised file and serve affidavits in reply, I would have been disposed to grant the adjournment and order Chippendale to pay the Commissioner's costs thrown away by the loss of the hearing date. My tentative view is that the Commissioner should not be ordered to pay any of Chippendale's costs and that perhaps Chippendale should be ordered to pay some part of the Commissioner's costs. The parties' submissions referred to earlier should include submissions as to costs. I certify that this and the preceding 44 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Associate: Dated: 3 February 1995 Heard: 1 December 1994 Place: Sydney Decision: 3 February 1995 Appearances: Mr J T Svehla of counsel instructed by Cowley Hearne appeared for the applicant. Miss R M Henderson of counsel instructed by the Australian Government Solicitor appeared for the respondent.

Otto Australia Pty Ltd v Commissioner of Taxation

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Judgment (45 paragraphs)

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