Actual insolvency
324 Further, I am satisfied that at all times during the Relevant Period, the Company was not able to pay all its debts as and when they became due and payable and thus it was insolvent pursuant to s 95A(2) of the Corporations Act.
325 While the Company was generally profitable during the period 30 June 2010 to 30 June 2014 (with the exception of the year ended 30 June 2013), the Company held insufficient funds to meet its tax liabilities. Further, the Company held a negative net asset position during the period 30 June 2010 to 30 June 2014 (with the exception of the year ended 30 June 2012).
326 Moreover, the amount outstanding on the Company's integrated client account with the ATO (Integrated Client Account) increased from $78,524.84, at the commencement of the Relevant Period, to $235,473.42, at the end of the Relevant Period. In the same period, the amount outstanding on the Company's Income Tax Account 551 (Income Tax Account) reduced, but $21,700.82 remained outstanding as at 5 February 2015.
327 On 4 and 5 March 2013, the ATO agreed to enter into payment arrangements with the Company for it to pay its outstanding tax liabilities on the Income Tax Account and the Integrated Client Account, respectively. By 29 April 2013, however, the Company had defaulted on the Income Tax Account payment arrangement. The Company also failed to comply with Integrated Client Account payment arrangements shortly after the ATO had agreed accept those arrangements. Although the Company paid the first two monthly instalments of $1,000 in March and April 2013, it failed to pay the May 2013 instalment when it was due. On 15 May 2013, the ATO accepted a request from the Company for a new payment arrangement for the Integrated Client Account but on 6 June 2013, the ATO refused a request by the Company for a further payment arrangement with respect to both the Income Tax Account and the Integrated Client Account. On 1 July 2013, the ATO informed the Company that it has issued a garnishee notice to the CBA with respect to its then outstanding liability to the ATO of $180,439.48. On 9 September 2014, the ATO formally refused another request from the Company to pay the debts outstanding on the Income Tax Account and the Integrated Client Account by instalments.
328 I am satisfied that at no time during the Relevant Period was the Company in a position to pay its outstanding tax debts in full or make any material reduction in the amounts outstanding. Ms Lindsay, the defendants' expert, concluded in her principal report that the insolvency of the Company from 6 June 2013 to 9 September 2014 and 9 October 2014 to 6 February 2015 was largely determined by what she described as "the ATO's intention to classify the Company's debt as immediately payable". Ms Lindsay excluded the period between these two periods on the basis that during that period "the ATO was prepared to enter into another payment plan arrangement".
329 The Company's outstanding indebtedness to the ATO, however, remained due and payable throughout the whole of the Relevant Period, in the absence of any formal agreement to defer or stay the debt. Moreover, as explained at [327] above, for much of the period the ATO declined requests from the Company to enter into agreements for payments to be made by way of instalments.
330 The agreements for payments to be made by way of instalments were entered into pursuant to s 255-15 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TA Act).
331 Section 255-15 is contained within Subdiv 255-B of Sch 1 of the TA Act. That subdivision is headed "Commissioner's power to vary payment time" and contains the following three sections:
255-10 To defer the payment time
Deferrals for particular taxpayers
(1) The Commissioner may, having regard to the circumstances of your particular case, defer the time at which an amount of a *tax-related liability is, or would become, due and payable by you (whether or not the liability has already arisen). If the Commissioner does so, that time is varied accordingly.
Note: General interest charge or any other relevant penalty, if applicable for any unpaid amount of the liability, will begin to accrue from the time as varied. See, for example, paragraph 5-15(a) of the Income Tax Assessment Act 1997.
(2) The Commissioner must do so by written notice given to you.
Deferrals for classes of taxpayers
(2A) The Commissioner, having regard to the circumstances of the case, may, by notice published on the Australian Taxation Office website, defer the time at which amounts of a *tax-related liabilities are, or would become, due and payable by a class of taxpayers (whether or not the liabilities have already arisen).
(2B) If the Commissioner does so, that time is varied accordingly.
(2C) A notice published under subsection (2A) is not a legislative instrument.
Deferral does not affect time for giving form
(3) A deferral under this section does not defer the time for giving an approved form to the Commissioner.
Note: Section 388-55 allows the Commissioner to defer the time for giving an approved form.
255-15 To permit payments by instalments
(1) The Commissioner may, having regard to the circumstances of your particular case, permit you to pay an amount of a *tax-related liability by instalments under an *arrangement between you and the Commissioner (whether or not the liability has already arisen).
(2) The *arrangement does not vary the time at which the amount is due and payable.
Note: Despite an arrangement under this section, any general interest charge or other relevant penalty, if applicable for any unpaid amount of the liability, begins to accrue when the liability is due and payable under the relevant taxation law, or at that time as varied under section 255-10 or 255-20.
255-20 To bring forward the payment time in certain cases
(1) If the Commissioner reasonably believes that you may leave Australia before the time at which an amount of a *tax-related liability becomes due and payable by you, the Commissioner may bring that time forward. If the Commissioner does so, that time is varied accordingly.
Note: General interest charge or any other relevant penalty, if applicable for any unpaid amount of the liability, will begin to accrue from the time as varied. See, for example, paragraph 5-15(a) of the Income Tax Assessment Act 1997.
(2) The Commissioner must do so by written notice given to you.
332 An arrangement made pursuant to s 255-15 of the TA Act does not vary the time at which a liability to the Commissioner is due and payable, as is made clear by s 255-15(2): Clifton (Liq) v Kerry J Investment Pty Ltd t/as Clenergy (2020) 379 ALR 593; [2020] FCAFC 5 at [504]-[505] (Besanko, Markovic and Banks-Smith JJ). In contrast, s 255-10 of the TA Act permits the Commissioner to defer the time at which a tax related liability "is, or would become, payable" and s 255-20 of the TA Act provides that the Commissioner may bring forward the time at which a tax related liability becomes "due and payable".
333 The reasoning of the Full Court in Clifton with respect to s 255-15 of the TA Act was obiter, as made clear by their Honours at [207]-[208] but it was a considered statement of principle by an intermediate appellate court. In Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036 at [39], Black J accepted that Clifton supported the proposition that in the absence of a formal deferral of a debt due to the Commissioner, the debt remained due and payable, and on no view, could it be regarded as plainly wrong, given the express terms of s 255-15(2) of the TA Act.
334 The Full Court in Clifton rejected a submission by the respondent that the term "due and payable" in s 255-15 of the TA Act had a narrower meaning than the term when used in s 95A of the Corporations Act for the purpose of assessing insolvency. Their Honours stated at [515]:
The description of debts as due and payable is used widely in the TA Act in the context of when a liability to pay tax accrues and when payment of that liability is due. We agree with the primary judge that the term due and payable is well known. Section 95A of the Corporations Act provides that A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable. Nothing in s 95A of the Corporations Act qualifies the meaning of the term. As is well recognised, part of the exercise required by s 95A in assessing solvency is a consideration of the terms of each relevant debt and whether it is due and payable at the relevant time the subject of consideration. Part of that consideration includes ascertaining and reviewing the contractual terms relevant to any obligation that arises under contract and a consideration of the relevant statutory terms where, as here, an obligation arises under statute. Section 255-15 clearly informs the question of when a liability is due and payable where there is a payment arrangement, just as s 255-10 informs the question of when a liability is due and payable where there has been a deferral granted by the Commissioner. There is nothing in that process that requires or suggests that due and payable in s 255-15, or indeed Subdivision 255-B of the TA Act, has any particular or confined meaning.
335 Much of the defendants' submissions seeking to contest insolvency by reason of the outstanding tax debts could be best characterised as an appeal to commercial reality, hardship and implied waiver. Similar submissions were rejected in Clifton. As their Honours stated at [517]:
One can well understand that directors of a company might find it incongruous that having secured an arrangement for payment by instalments they remain obliged to take the full liability into account when considering whether the company is able to pay all of its debts on a particular date. At least in the case of contractual debts some latitude in the time for payment might influence the question of whether a debt is due and payable at a certain time: Lewis v Doran at [106]. However, here we are concerned with a debt arising under statute and where the only relevant arrangement as to payment arises in accordance with statutory terms (that is, s 255-15).
336 In the course of considering arguments based on commercial reality or waiver advanced by the respondent in Clifton, their Honours referred at [525] to the statement by the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; [2008] HCA 41 at [44] (Gummow ACJ, Heydon, Crennan and Kiefel JJ) that perceived hardship to a taxpayer in treating them as having to pay tax that has been assessed when an objection has not yet been decided upon was not a basis for the Court to narrow the operation of a statute by reference to business convenience or similar considerations. Their Honours also referred at [520] and [523] to the statements by Palmer J in Hall v Poolman [2007] NSWSC 1330 at [91] and [110] that a director could not disregard a clear and unequivocal statutory statement that a debt remained due and payable by an appeal to commercial reality, and absent an agreed deferment or stay, the debt could not be treated only as a contingent liability.
337 Their Honours concluded in Clifton at [534]-[537]:
We accept, as noted by Palmer J, that the approach in s 255-15 reflects a deliberate legislative policy that regardless of entry into an arrangement, the debt remains due and payable. This is particularly clear where, in contrast, the surrounding provisions permit deferral of liability (s 255-10 and s 255-20).
We do not consider the fact that insolvency is to be determined for the purpose of or in accordance with the Corporations Act justifies any different result. Although the Court in both Hall v Poolman and Broadbeach considered the statutory liability under the tax legislation in the context of different provisions of the Corporations Act, it is relevant that those Corporations Act provisions related to insolvency.
Further, in both cases the Court referred to the perception that a result might be harsh in circumstances where there remains a pending review process as to disputed liability. Regardless, the Court found in those cases that potentially deleterious consequences, where there might ultimately be no liability at all, did not justify departure from a strict application of the statutory provisions.
We note that in both Hall v Poolman and Broadbeach the Court considered hardship in the context of a challenge to underlying liability. In this case, liability is accepted (at least for current purposes), and the alleged hardship relates to the consequences on an assessment of solvency where the debts are considered due and payable regardless of the conditional permission granted to pay the liability over time. We do not regard that distinction as justifying any different outcome. Hardship by way of threats to solvency or pressure upon cash flow might arise from treating a liability as due and owing when it might ultimately be found to be not owing (and hardship might arise even where such payment is later reversed), and similarly might arise from treating a debt as immediately due and payable although it might be paid over time.
338 For the foregoing reasons, I am satisfied that the Company was insolvent at all times during the Relevant Period.