Apex People Pty Limited (In Liquidation) v The Commissioner of Taxation

[2006] NSWSC 133

CITATION:	Apex People Pty Limited (In Liquidation) & anor v The Commissioner of Taxation [2006] NSWSC 133
HEARING DATE(S):	21, 22 and 23 November 2005
JUDGMENT DATE :	15 March 2006
JURISDICTION:	Equity Division
JUDGMENT OF:	Windeyer J at 1
DECISION:	Judgment for plaintiff for the sum of $843,137.60.
CATCHWORDS:	CORPORATIONS - unfair preferences - company was insolvent when payments made - defence under s588FG not made out
LEGISLATION CITED:	Corporations Act 2001, s558E, s558F, s558FG
CASES CITED:	Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation (2004) 51 ACSR 530
PARTIES:	Apex People Pty Limited (In Liquidation) (First Plaintiff) Manfred Holzman as liquidator of Apex People Pty Limited (In Liquidation) (Second Plaintiff)
FILE NUMBER(S):	SC 4105 of 2004
COUNSEL:	Mr S Golledge (Plaintiffs) Mr P Fury (Defendant)
SOLICITORS:	Piper Alderman (Plaintiffs) ATO General Counsel (Defendant)

- 10 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

WEDNESDAY 15 MARCH 2006.

4105/04 APEX PEOPLE PTY LIMITED (IN LIQUIDATION) & ANOR V THE COMMISSIONER OF TAXATION

JUDGMENT

Outline

1 Mr Holzman, the second plaintiff, is the liquidator of Apex People Pty Limited (In Liquidation) (Apex), the first plaintiff. He seeks to recover from the defendant, the Commissioner of Taxation, amounts totalling in all $923,358 paid by the company to the Commissioner during the relation back period.

2 Apex was placed into administration on 23 July 2001. Mr Holzman was appointed administrator. On 17 August 2001, the creditors resolved that the company be wound up and Mr Holzman became liquidator. It follows that the winding up commenced on 23 July 2001 so the relevant period for preference purposes is from 23 January 2001 to the date the winding up commenced. During that time Apex made ten separate payments totalling $923,358 to the defendant Commissioner.

Law

3 It is not necessary to set out the relevant sections of the Corporations Act 2001 (the Act). As a result of admissions on the pleadings and concessions made at the outset, it is accepted that the plaintiff liquidator will succeed in his claim in respect to a particular individual payment if:

(a) He establishes that at the date of the particular payment Apex was insolvent and

(b) The Commissioner fails to make out a defence in respect of that payment available under s558F(2)(b) of the Act.

The principles upon which the defence is to be considered are determined in Cussen as Liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation (2004) 51 ACSR 530.

4 It is conceded that Apex was insolvent as at 1 April 2001. It is thus to be presumed to be insolvent from that date until the date the winding up commenced; s588E(3) of the Act. The ten payments which the liquidator claims amounted to unfair preferences are the following:

Date of payments (per bank statements)	Particulars	Amount
1	30 January 2001	November 2000 Group Tax	$127,114.00
2	6 February 2001	Interest charge	$660.40
3	12 February 2001	BAS Instalment (Sept quarter)	$100,000.00
4	21 February 2001	January 2001 Group Tax	$80,221.00
5	26 February 2001	BAS instalment (Decem quarter)	$148,591.00
6	22 March 2001	February 2001 Group Tax	$119,064.00
7	26 April 2001	March 2001 Group Tax	$73,603.00
8	4 May 2001	BAS instalment	$100,000.00
9	23 May 2001	BAS instalment	$50,000.00
10	25 May 2001	Group Tax	$58,984.00
11	29 May 2001	BAS Instalment	$65,010.08
12	22 June 2001	Interest charge	$111.12
$923,358.60


The payments made after 1 April 2001 would, in accordance with the concession, be voidable as insolvent transactions and unfair preferences unless the s588FG(2) defence is made out.

Facts relating to insolvency

5 Apex Consulting Pty Limited (A.C.N. 069 618 159) was formed on 19 June 1995. It changed its name on 30 October 1997 to Akabensa Pty Limited. On that date, namely 30 October 1997, another company, namely Apex Consulting Group Pty Limited (A.C.N. 080 584 569) was formed. It changed its name on 7 May 2000 to Apex People Pty Limited. I have never understood why changes such as this are permitted. One of the most common reasons for their taking place is to mislead, confuse and in some cases defraud creditors. I am not necessarily saying that this is the case here, except that one of the funders who, by way of loan lent funds to the original Apex company, did not know of the change of name or formation of the new company. In some unexplained way his loan was said to have been taken over and become a liability of the new company.

6 The business of the company was executive recruitment. For whatever reason the business deteriorated. It may have been reasonably successful at certain periods, but certainly the financial state of affairs in the company seemed to deteriorate after 30 June 2000. The question is, however, whether it was unable to pay its debts as they fell due at some time prior to 1 April 2001, and if so when. The primary case for the liquidator is that the company was clearly insolvent as at 31 December 2000 and possibly earlier and continued thereafter.

7 Although all the figures may not be totally reliable the Commissioner has not been able to point to a major problem with them. As at 31 December 2000 the evidence mostly appearing from the books and records of the company establishing the following:

(a) There was a trading loss for the six months to 31 December 2000 of over $300,000 (the figures produced varied from month to month on the management accounts presumably as income and outgoings referrable to each month were adjusted. There was, however, always a loss shown.)

(b) There was a deficiency of assets over liabilities as at that date of about $163,000 and a deficiency in working capital – ie current assets less current liabilities – of $76,000. The liquidator claims that the deficiency was $126,000 but that is dependent upon whether he is correct in his view that an asset classed as a current asset should not have fallen into that category.

(c) There were unpaid superannuation payments for employees for the months of July, August, September and October as at 31 December 2000. Reminder notices had not brought about any payment.

(d) Trade creditors were as a matter of course paid late. Had they been paid within normal terms, other creditors, particularly the defendant Commissioner, could not have been paid. In June 2000 about 80% of the total balance of creditors accounts was paid within 30 days, but by 31 December 2000 only about 7% was paid in that period. There are many overdue accounts, reminder notices and the like in evidence making it clear that the payments were not being made within the agreed terms. I should point out however that it does not appear that court action was taken to recover the overdue amounts or that any statutory demands for payment had been served under the provisions of the Act or its predecessors.

(e) Cheques were written out, or at least cheque butts were dated, a considerable time before presentation in some cases. It is obvious creditors, particularly the Commissioner, would bank cheques on receipt. The reason for the difference between what could be described as the writing out of the cheque date and its being sent to the creditor could have been to enable Apex to say that a cheque had been written.

(f) Apex was required to lodge its BAS statement for the three month period ending 30 September 2000 by 11 November 2000 and pay the amount due on that date. It probably lodged it late, but in any event paid only $202,554 of a total liability of $352,504. It paid $50,000 on 3 January 2001 and $100,000 in February 2001. Bank records indicate that there were no funds available before that date to enable complete payment to be made. Prior to the date when the $100,000 was paid the second quarter BAS payment was due. The amount due was $348,591. Of that amount $148,591 was paid on 20 February 2001 probably accompanied by a letter stating the balance would be paid by four instalments of $50,000 each every two weeks to clear the liability by 31 March 2001. In fact $100,000 was paid on 4 April 2001, $50,000 on 23 May 2001 and $65,018 on 29 May 2001, the last payment including some interest charges.

8 I consider it perfectly clear that Apex could not pay its debts as they fell due on 31 December 2000. It could not pay its outstanding tax liability in full; it could not make superannuation payments which it was required to make and it could not pay all its trade creditors on the normal trading terms. It could stall for time by paying parts of each set of creditors, but that is all. Directors did blame a downturn in income after the Olympic Games as the cause of part of the problem, but whether or not that was correct there was no attempt made or reason given to show that there was just a short term liquidity problem. Debtors were factored; there is no suggestion further equity or loan funds would be forthcoming; past outstanding superannuation payments were met only by additional temporary borrowings which only transferred one creditor to another creditor, and major payments such as tax payments were made at times corresponding with substantial payments, often from the factoring company, being placed into the bank account.

9 I find the company insolvent as at 31 December 2000. It is therefore deemed to be insolvent thereafter. In any event the position deteriorated after that when two of the funders sought to withdraw their funds.

The position at 30 January 2001

10 The company did not have a good record with the Tax Office. Payments of tax instalments whether group tax, GST or other instalments were generally late from 1999 but not sufficiently late to cause great concern. A letter of demand for outstanding amounts of $162,194 was issued in the middle of 2000, which seemed to cause the account to be brought up to date by August 2000. Nevertheless the position was that the company had been referred to the debt recovery section in 2000. It may have been taken out of that section at some later date. The evidence does not make that clear, but it was certainly referred back to the debt section in December 2000. The group tax for August 2000 due on 21 September was paid on 9 October 2000 which brought the account close to being in order, but after that it was never in order again although it appeared to be in order by the end of May 2001, but only because no BAS statement was lodged for the quarter ending 31 March 2001. Group tax for October due on 24 November was not paid until 2 January 2001. Group tax for November, due on 21 December 2000 was not paid until 29 January 2001. Payments for January, February, March and April 2001 were paid within a few days of the due dates, but at the time each of those payments was made there remained unpaid liabilities for quarterly payments for tax instalments, GST and interest commencing with the September 2000 instalment and continuing.

11 There are of course reasons to make group instalment payments on time in preference to general tax liabilities if there are insufficient funds to pay all tax debts as group tax moneys are in the nature of trust money.

12 The payment of $127,114 made on 30 January 2001 was for the November group tax due on 21 December 2000. At the time it was paid Apex had not paid the whole of the debt of $352,554 due for the various payments which I have referred for the quarter ending 30 September 2000, there being $100,000 still outstanding. It is put that the payment record for Apex was just an indication of a temporary cash flow problem. That would be one way to look at the matter if the running balance on what is called the ATO Integrated System Account Posting List, is relied upon but this and the effective date column on the document give a quite unhelpful picture of the true position. That is because the running balance does not show amounts payable on particular dates but is based upon information in taxpayer returns on the date the particular return is processed. That return may of course have been received after the due date for payment which was almost invariably the case with the Apex account. However, there are prescribed dates for group payments and BAS quarterly payments. These dates are set and the Commissioner must be taken to be aware of non-compliance, at least on a regular basis by a particular taxpayer as this is set out as one of the matters requiring consideration in his implementation through his staff of his Accounts Receivable Policy, a copy of which is in evidence.

13 At the time this first challenged payment was received the Commissioner knew about the amount outstanding for the September quarter. He knew, or his officers knew because a return had been lodged and an initial payment of $202,544 had been paid, albeit late, and a further $50,000 was paid on 3 January 2001. $100,000 was outstanding. While it is obvious that group tax was paid in priority to other taxes, the first challenged payment was five weeks late. Whatever the position of the Commissioner as shown on the integrated return, that fact, and the fact that all payments due for the quarter ended 30 September 2000 were not paid on time and the part payments were apparently remitted without explanation would, I consider, have the result that a reasonable person in the circumstances of the Commissioner would have had reason to suspect that the company was insolvent and could not pay its debts as they fell due. Not only that, but as the Commissioner has not called any evidence from any person who was concerned with the Apex account at the relevant time I am unable to see how the defence under s588FG(2)(b)(i) could be made out. Evidence of Mr McMahon that many companies with a history of late payments to the Commissioner do not end up in liquidation is of little assistance or relevance. Of more relevance may be the Commissioner’s Accounts Receivable Policy document identifying risk factors which include previous compliance history. The document also makes repeated reference to applications for deferment or time to pay and to the fact that it is the obligation of the taxpayer to lodge returns on time. A lot of time was spent on this document by counsel for the liquidator, but those two matters are the ones of relevance. The defence as to this payment fails.

14 The payment of $80,221 for the January group tax was received on 21 February 2001. At that time apart from a small amount of about $1,125 for interest all tax debts had been paid. The challenged payment was made on time. While it was a withholding tax payment in circumstances where the account was generally in order, and in circumstances where the Commissioner had made no enquiries about other creditors, I do not consider he, or a reasonable person in his circumstances, would have grounds to suspect Apex was insolvent. The claim for this figure fails.

15 The BAS statement for the quarter ended December 2000 was not lodged until 26 February 2001. There was some disputed evidence about whether a letter enclosing the return together with a cheque for part payment of $148,591 was sent. The cheque butt is dated 7 February and a copy of a letter is dated that date. The amount of $148,591 is referred to in that letter, together with a promise to pay the outstanding amount of $200,000 by the end of March by equal fortnightly payments. The Commissioner says that there is no proof that letter was received. There is evidence of a history of cheques being written and dated well before despatch. I find it more likely than not that it was sent with the BAS return and cheque for $148,591 and that it was received on or about 26 February. Apart from anything else, at the beginning of April, Betty Crofton, a member of the staff of the Tax Commissioner in the Debt Recovery Section made efforts to get in touch with Mr Chaffey, a director and general manager of Apex. That was at the time full payment could have been expected in accordance with the letter. This officer was not called to give evidence. There was no suggestion in the letter of any temporary cash flow problem. A reasonable person in the circumstances of the Commissioner receiving the letter would have realised or at least had a suspicion that Apex was not able to pay its debts as they fell due as no reason was given for not making full payment. A reasonable person in the circumstances of the Commissioner receiving a cheque for part payment would have had the same suspicion in the light of past history. That past history was at least an indication of insolvency as it was of temporary cash flow problems.

16 Miss Bell took over conduct of the Apex file towards the end of April 2001. She telephoned Mr Chaffey on 27 April and left a message for him to speak to her. On 4 May Miss Bell spoke to Mr Chaffey who said he had sent $100,000 already, he would send $50,000 the next week and the balance the week after that. Miss Bell accepted that and forwarded a payment arrangement letter on 4 May setting out an agreement to accept $100,000 on 9 May, $50,000 on 14 May and $65,610.08 on 21 May the last figure including estimated interest. While the $100,000 was paid by the due date the $50,000 was paid on 23 May and the $65,610.08 on 29 May. In the meantime the group tax due on 25 May was paid on time.

17 At the time these last three payments were made the time for lodgement of a BAS statement for the quarter ended 31 March 2001 and payment of the amount payable pursuant to that return had gone by. No such return was lodged. I consider that a reasonable person in the circumstances of the Commissioner would suspect that a company was insolvent if it gave no reason for having to pay tax liabilities by instalments, which had a bad record in regard to making payments on time, and had failed, although not for a long period, to make agreed instalment payments on time and had failed to lodge a quarterly BAS on time. In the circumstances the defence has not succeeded other than for the payment of $80,221. The plaintiff is entitled to judgment in the sum of $843,137.60.

18 There is a claim for interest in the originating process. The parties should be able to agree on this and I will stand the matter over for a few days to enable that to be done and for the plaintiff to bring in draft orders. The plaintiff liquidator has been largely successful and should have an order for costs against the defendant.

**********