Superior Press Pty Ltd (in liq) v Deputy Commissioner of Taxation & Clark [2004] VSC 111

5. On 31 August 2001 Mr Clark as director of the Company must have been of the opinion that the Company was insolvent, or was likely to become insolvent, or that for some other reason it was appropriate that an administrator be appointed for he then resolved to appoint the secondnamed plaintiff, Kenneth Sellers, pursuant to s.436A as its administrator. On 27 September 2001, at the second meeting of creditors held pursuant to Part 5.3A, the creditors of the Company resolved that it be wound up and Mr Sellers became the liquidator.

8. In this proceeding, commenced on 4 December 2001, the Company and the liquidator sue the defendant, the Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner") seeking a declaration that five payments made by the Company to the Commissioner between 30 April 2001 and 12 July 2001 and totalling $563,720.80 are voidable transactions within meaning of s.588EE, and that the Commissioner should pay that sum to the Company pursuant to s.588FF.

11. The Commissioner defended the claim and has brought third party proceedings against Mr Clark seeking an order pursuant to s.588FGA that he pay to the Commissioner an amount representing its loss and damage in the event an order is made in the Liquidator's claim.

14. As will be seen, the Liquidator and the Commissioner have reached agreement on the Liquidator's claim so that the trial focused on the claim against Mr Clark. In his defence to the third party claim, Mr Clark puts the third party claim in issue and raises two affirmative defences. First, the statutory defence or defences available under s.588FGB(3) and s.588FGB(4), that at the time of each of the payments he had reasonable grounds to expect and did expect that the Company was solvent and that it would remain solvent even if it made the payment, and that he held such an expectation on the basis of information provided by a competent and reliable person.

17. The second defence, or defences, was based upon a settlement which was said to have been reached between him and the Commissioner in or about August 2002 under which he paid to the Commissioner the sum of $113,200. It is said that this settlement discharged any liability to the Commissioner, including the liability the subject of the third party claim. An associated defence is that the Commissioner, by its silence, represented to him that the effect of the settlement was to discharge that liability and that the Commissioner is estopped from denying that this is so.

20. The five alleged voidable payments are as follows:

The total in fact comes to $563,702.80, but nothing turns on the small discrepancy. The payments are admitted in the pleadings. I was told at the outset that the Liquidator and the Commissioner have agreed that the payments are voidable and that the appropriate repayment is $388,702.80, representing all of the first four payments and 50 per cent of the fifth.

25. Notwithstanding this agreement I was told that the Commissioner felt unable to consent to such an order. This was in part because it was thought that such an agreement would be ineffective to meet the requirement of s.588FF(1) that the court itself be satisfied that the payments were voidable transactions, and partly for fear that the consent order would be ineffective to bring into existence a liability in the director pursuant to s.588FGA. I express no view as to the correctness of the former reason which is contrary to strong authority in New South Wales.[1]

28. Nevertheless the plaintiff's proofs were not seriously challenged by counsel for the Commissioner or indeed by counsel for Mr Clark. I am satisfied that each of the payments was a transaction made between the Company and the Commissioner as a creditor of the Company which resulted in the Commissioner receiving from the Company, in respect of its unsecured indebtedness by the Company to the Commissioner, more than the Commissioner would receive from the Company in respect of that indebtedness if the transaction were set aside, and if the Commissioner were to prove in the winding up. Each of the payments is therefore a unfair preference within the meaning of s.588FA(1).

31. It was accepted by counsel for the Commissioner, and not seriously challenged by counsel for Mr Clark, that at the time of each of the payments the Company was insolvent, so that each unfair preference is an insolvent transaction within the meaning of s.588FC.

34. It was common ground too between all parties that each of the payments was made within the relation back period so that each insolvent transaction is a voidable transaction within the meaning of s.588FE. I am so satisfied for the purposes of s.588FF(1).

37. The consequence of this is that the plaintiffs are entitled to a declaration to this effect. I will also make a order for payment to the Company pursuant to s.588FF(1). The plaintiffs and the Commissioner having agreed that the amount to be paid is $388,702, subject to matters which I shall refer to hereafter. I will make an order for payment of the appropriate sum together with interest and costs.

40. I should say that on the evidence before me I would have been satisfied that a greater amount should have been paid, but I will respect the agreement of those parties, so that an order for a lesser sum is no disadvantage to Mr Clark. I should add, too, that I did not have the benefit of detailed argument or evidence which may have been presented on behalf of the Commissioner and which doubtless warranted the compromise.

43. Turning to the third party claim, the formal proofs were not challenged. The event which triggers the operation of s.588FGA is the making of an order against the Commissioner pursuant to s.588FF in respect of an amount under one of a number of specified provisions of Income Tax Assessment Act 1936. The evidence shows that the first four payments were appropriated by the Company in respect of particular liabilities and that the fifth payment was appropriated by the Commissioner in respect of other liabilities.

47. Each of the debts which is shown in italics in the above table is a liability under one or other of the specified provisions of the Income Tax Assessment Act and therefore provides a basis for a claim under s.588FGA.

50. I turn now to the defences based on Mr Clark's expectation of solvency. I repeat that on his behalf there was no serious challenge to the evidence of the Liquidator that at the relevant time the Company was in fact insolvent. The issue here is as to his state of mind, a matter upon which he bears the burden of proof.

53. The evidence showed that Mr Clark is a printer by trade and that he conducted the business of printer through this company for some 20 years. He was the only director of the Company and its principal shareholder. He said that he was concerned with sales and printing and that he left the financial matters to his accounting employees and external accountants.

56. Nevertheless the evidence showed that he knew a number of matters. The Company was continually behind in its tax payments since March 2000. Payments were made on account of this indebtedness, but on 17 May 2000 it stood at $115,208. Arrangements for payment of arrears were made on 23 May 2000, 9 November 2000 and 12 February 2001. On 14 March 2001 the total amount outstanding was $443,569.87.

59. He knew too that on or about 21 March 2001 the Commissioner served on the Company a s.459E demand for the sum of $444,491.91. The demand was not complied with and, on or about 21 May 2001, a winding up application was filed in this court in proceeding number 5885 of 2001. On 19 June 2001 the Company and the Commissioner agreed a payment schedule, and on 18 July the application to wind up was discontinued. All of the payments presently under consideration were made under the shadow of that proceeding. The first two payments were made prior to the filing of the application to wind up. They represented the balance of the amounts payable under the March 2001 BAS. The third payment made on 12 June 2001 represented the amount payable under the April BAS. The fourth payment made on 21 June 2001 was made pursuant to the agreement of 19 June 2001 and represented the amount payable under the May BAS. The remaining payment of $350,000 made on 12 July 2001 was a lump sum representing the proceeds of the sale of a printing press. According to Ronnie Chew, the officer at the Tax Office handling the collection file,

"this amount was paid against the outstanding liabilities stated in the winding up application."

63. After this payment these liabilities stood at $176,374 plus interest and legal costs. Under the terms of the 19 June agreement these were to be paid over the months of August, September and October 2001.

66. It is clear enough that the Company was unable to pay all of its taxation debts as they fell due in the months of April to July 2001 and that Mr Clark knew this.

69. With respect to its other creditors, Mr Clark on 26 June 2001 swore an affidavit in the winding up proceeding in which he asserted that the Company had an agreement with its seven major creditors that they would not seek to enforce debts pending an expected merger with another printer, Docklands Printer, "until trading conditions for the company improve."

72. No details of this agreement or agreements was or were provided. In evidence before me Mr Clark disclaimed the suggested agreement at least with respect to the creditor Boomerang Paper. The enquiries of the Liquidator show that shortly after 21 June 2001 five of these seven companies - AGFA, Boomerang Paper, Integral Energy, MV Anderson, Royal & Sun Alliance Insurance - were pressing for immediate payment. Of the remaining major creditors, the indebtedness of the Company to Spicers Paper stood at $506,051.97 as at 15 March 2001, and $508,567.06 at 31 May. Supplies thereafter were on a COD basis. Likewise supplies from AGFA after 21 May 2001 were on a COD basis.

75. Trade creditors as at 31 May 2001 stood at $1,375,461. Of this figure 16.6 per cent dated from December 2000, and 45 per cent were over the Company's normal 60 day trading terms. The Company ceased trading as from 30 June 2001, following trading losses of nearly $1 million in the preceding seven month period. Statements made by Mr Clark or by his accountant to the Commissioner's representatives in the relevant period show that they had no belief that the Company was solvent or any expectation that it would be solvent in the future. Moreover, under s.588GB the onus lies on Mr Clark of showing reasonable grounds for his expectancy of solvency. The evidence he has offered as to this does not discharge the onus. He seeks to tell me that he was ignorant of the true financial position of the Company so that he held the necessary expectation notwithstanding that this belied reality.

78. In a company of this size, given the pressure from the Commissioner for payment of taxation debts, I do not accept that a sole director would be ignorant of these matters. If perchance Mr Clark was ignorant of them, any expectation based only on established facts other than those matters, could not be described as being based on reasonable grounds. A director in such a company cannot set up the statutory defence by asserting a neglect of his directorial functions any more than he could by alleging wilful blindness.

81. The associated defence based on reliance upon information from others must likewise fail. In paras.3 and 4 of his affidavit sworn 26 March 2004, Mr Clark said he relied upon information from his outside accountant, Gary Busby of MV Anderson & Co, and from Rod Aitken, his employee accountant. He states baldly that Mr Busby provided information and Mr Aitken advice, neither of which is specified nor particularised, and that based on this he formed his expectation of solvency. Neither of those informants was called. With respect to Mr Busby, one can only wonder what his information might have been, for MV Anderson, his employer, was owed, as at 31 May 2001, $8,000, a debt dating from December 2000. And on 1 June 2001 it informed the Company that it would not undertake further work until it received a guarantee for payment for work done and for work to be done in the future.

84. This leaves only the defences based on the suggested settlement. Again, the facts are not controversial. In June 2001 the Company achieved a compromise of the debt upon which the winding up application was based, and this compromise it seems was honoured.

87. Meantime on 12 April 2001 and 23 May 2001 the Commissioner issued to Mr Clark as a director of the Company notices of directors' liability to pay the sum of $269,627 and $43,760 respectively. The first sum included three amounts totalling $162,893 which were paid as part of the $350,000, the fifth payment made on 12 July 2001 by the Company, which is the subject of the Liquidator's claim. After giving credit for this sum and a further $46,167.41, the Commissioner on 2 October 2001 issued a County Court writ against Mr Clark seeking the balance, namely, $104,236.59.

90. Soon after, on 5 December 2001, the plaintiffs commenced this proceeding seeking to recover the five preferential payments. The Commissioner in its defence filed on 2 January 2002, foreshowed a claim over for indemnity against the director under s.588FGA. The third party claim, however, was not brought until 6 December 2002, notwithstanding an order that it be filed in May 2002. It does not appear that until this third party notice was served on Mr Clark he was aware of the prospect of the claim presently brought against him.

93. In these circumstances Mr Clark sought in 2002 to reach agreement with the Commissioner with respect to the County Court claim, but without success. Default judgment was entered against him on 20 March 2002 for the sum of $110,347.34 including interest and costs.

96. Armed with this unsatisfied judgment, the Commissioner on 27 March 2002 issued a bankruptcy notice against Mr Clark, and, on or about 24 June 2002, a bankruptcy petition alleging an indebtedness of $112,506. Mr Clark continued to offer the Commissioner proposals for payment of this sum, but they were not accepted. On 9 August 2002 Mr Clark had arranged to borrow money on the security of his sister's house in order to pay the debt and the petition was further adjourned for this to be done. The adjourned hearing was fixed for 5 September 2002. On 3 September a cheque for $133,200, being the amount of the debt and costs, was received by the Commissioner and the petition was withdrawn.

99. There is no evidence of any settlement agreement. The debt was paid in full. Nothing was said about the payment having the effect of discharging any debt other than that described in the bankruptcy petition. The case of Mr Clark is based on the failure of the Commissioner to bring to his attention the prospect that he might be liable if any of the five payments made by the Company were set aside as preferential. It is true that this was not brought to his attention. I accept, too, that he was unaware of the prospect and that, had he appreciated this, he might not have resisted bankruptcy. These facts do not entitle Mr Clark to a finding that the payment had the effect of discharging other liabilities or potential liabilities. Moreover, all of this falls far short of an express or implied representation as alleged. The Commissioner was under no obligation, legal or other, to give any advice to Mr Clark. The affidavit material in support of the bankruptcy petition did not assert that the amount sought in the bankruptcy proceeding was the only amount the Commissioner was entitled to recover, or may in the future be entitled to recover, against him. To my mind, a fair reading of them does not contain any such inference. No estoppel arises as alleged in the third party defence. It follows that Mr Clark is liable under s.588FGA.

102. It remains now to fix the amount of his indebtedness. Under s.588FGA, Mr Clark is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order which I will make at the behest of the Liquidator against the Commissioner. The amount of the order sought, as it finally appears, is the amount of $388,702.80 together with interest from the date of the writ at the penalty interest rate, a total of $104,836.70 to this day, together with costs. The costs were agreed in the sum of $50,000. The total amount therefore sought is $542,742.79. I will make a declaration of indebtedness or liability against the Commissioner in that sum, and make orders accordingly for the payment of that sum pursuant to s.588FF.

105. The question with respect to the third party is complicated first by reason of the fact that the liability which passes to the director is only a liability in respect of certain of the payments which are set aside in the principal proceeding. These payments, as identified in the table that I have set out earlier, show that the total claim for indemnity is $130,019 in respect of the first four payments, together with one half of the payments, or that part of the fifth payment representing the prescribed debts. The amount of those debts in the fifth payment totals $209,673.41, so that one half of that amount is $104,836.70. The total amount of payments made pursuant to the order in the primary proceeding for which the director third party is liable is $234,855.70.

108. Section 588FGA(2) imposes upon the director a liability in these circumstances to indemnify the Commissioner in respect of any loss or damage resulting from the order. As a consequence of the order, the Commissioner will be obliged to pay, relevantly, $234,855.70. The Commissioner will then be entitled to prove in the winding up as an unsecured creditor. The evidence before me shows that the Liquidator expects to distribute to unsecured creditors a dividend of 10.6 cents in the dollar.

111. Criticism was addressed of this, at least at this point of the judgment, on the basis that the final distribution cannot be known until all the figures have been resolved. That is of course true. On behalf of the Commissioner, however, it was said that my task is simply to quantify loss and damage, and that I can do that in the light of the evidence and having regard to the probabilities as to what will be the distribution in the future.

114. The Liquidator, when questioned about the certainty of the 10.6 cents in the dollar distribution, accepted that it could move slightly. But given the figures upon which it is based, it seems very unlikely that anything in the foreseeable future will have a very substantial effect. Accordingly, I accept his dividend of 10.6 per cent as being an amount which should be brought to credit in calculating the loss or damage of the Commissioner. This represents $24,894.70, so that the loss, leaving aside for a moment interest and costs, as a consequence of the order, is $209,960.

117. The Commissioner next says that it has incurred an obligation to pay interest to the Liquidator in the sum of $104,039.99, and that this liability is also its loss and damage, at least when the payment is made. Again, I accept that this is the case and therefore will add the amount of interest which it is to pay under the judgment in the primary proceeding as part of the claim to be brought against the third party, subject to something that will follow.

120. Next, it is said that the director third party should pay or contribute to the costs incurred by the Commissioner and paid to the Liquidator for its costs. It will be recalled that this was an agreed sum of $50,000. Counsel on behalf of the third party observed that this was agreement to which his client was not a party, and that the court should not see itself as bound by it. Again, I remind myself that my task is to estimate the loss and damage in respect of which liability to indemnify arises. I can well understand the situation where an agreement as to costs is so at variance from what might be expected that it could be said that it does not result from the order, but results from some other arrangement between the parties. The figure of $50,000 does not fall into that category. Accordingly, I will include the $50,000 in the calculation.

123. So that the total amount in respect of which claim against the third party is sought, in respect of interest and costs payable and to be paid by the Commissioner to the Liquidator, is a share of $154,039.99. The Commissioner does not seek the whole of that sum against the third party, it being accepted that this sum represents in part a liability to the Liquidator which is of no concern to the director under s.588FGA. The proposal is that the sum payable to the Liquidator should be adjusted in the same ratio as the sum payable by the director to the Commissioner bears to the sum payable by the Commissioner to the Liquidator, a figure of 69.1 per cent. I am content to adopt that as a fair estimate of the loss and damage as a result of the order incurred by the Commissioner. The sum for interest and costs, therefore, becomes $106,441.63.

126. Accordingly, the order that I propose to make against the director pursuant to s.588FGA(3) will represent the aggregate of $209,960 plus $106,441.63, which is $316,401, ignoring the 63 cents. Subject to confirmation of the arithmetic, judgment should therefore go in that sum. The Commissioner does not seek interest on that sum against the third party.

130. I will order that the costs of the third party proceeding, including any reserved costs, be paid by the third party to the defendant.

[1] Cadima Express v Deputy Commissioner of Taxation [1999] NSWSC 1143; (1999 33 ACSR 527 (Austin J); SJP Formwork (Aust) Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 604; (2000) 34 ACSR 604 (Santow J)