Christopher John Palmer v Commissioner of Taxation

[2006] NSWSC 1253

CITATION:	Christopher John Palmer v Commissioner of Taxation [2006] NSWSC 1253
HEARING DATE(S):	06/11/06
JUDGMENT DATE :	6 November 2006
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
EX TEMPORE JUDGMENT DATE:	11/06/2006
DECISION:	1. Order that judgment be entered for the plaintiff against the defendant in the sum of $32,504.34; 2. order that the defendant pay the plaintiffs costs of the proceedings; 3. on the interlocutory process of the Commissioner of Taxation, I make a declaration in accordance with paragraph one of the interlocutory process; 4. order that judgment be entered for the Commissioner of Taxation against Mr David Eric Stevenson in the sum of $23,805.01; 5. make an order in accordance with paragraph 3 of the interlocutory process; 6. order that the respondent to the interlocutory process pay the Commissioner of Taxation's costs of the interlocutory process; and 7. the exhibits may be returned after 28 days.
CATCHWORDS:	CORPORATIONS – Winding up – Recovering property or compensation for the benefit of creditors of insolvent company – Voidable transactions – Plaintiff, the liquidator of a company, sought to recover payments made by the company to the Commissioner of Taxation – Company made payments whilst insolvent – Whether payments to Commissioner had unfair preferential effect – Whether director of company liable to indemnify Commissioner pursuant to s 588FGA Corporations Act – Held that plaintiff entitled to recover payments made by company – Held that director of company liable to indemnify Commissioner.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Civil Procedure Act 2005 (NSW)
PARTIES:	Christopher John Palmer v Commissioner of Taxation
FILE NUMBER(S):	SC 6484/05
COUNSEL:	Plaintiff: S Golledge Defendant: M Chow Cross-Defendant: D Stevenson - Director
SOLICITORS:	Plaintiff: Hicksons Defendant: ATO Legal Services

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Monday, 6 November 2006

6484/05 Christopher John Palmer v Commissioner of Taxation

JUDGMENT

1 HIS HONOUR: This is an application by the liquidator of Stevenson Plumbing Services Pty Ltd (in liquidation) for the recovery of two payments made by the company to the Commissioner of Taxation on 9 December 2003 and 8 July 2004. The company was wound up by an order of this Court on 23 July 2004 pursuant to an application filed on 19 May 2004. The liquidator seeks to recover the payments as voidable transactions. He says that the transactions are voidable pursuant to s 588FE of the Corporations Act 2001 (Cth). The transactions were entered into during the six months ending on the "relation-back" day. He says they were insolvent transactions, which gave an unfair preference to the Commissioner as a creditor of the company.

2 The evidence discloses that the company was insolvent at the time the payments were made. It had incurred trading losses in the years ended 30 June 2002 and 30 June 2003, although it recorded a net profit for the 12 months ended 30 June 2004 of $20,449.44. However, it had prior year losses of $69,959.92. Its balance sheet as at 30 June 2004 disclosed current liabilities of $116,358.19. The balance sheet disclosed that it had total assets of $86,847.71.

3 The records of the Australian Taxation Office (“ATO”) disclose that the balance sheet substantially understated the company's taxation liabilities. The Commissioner did not dispute that the company was insolvent when the payments were made. Nor does he dispute the preferential effect of the payments.

4 The account history of the company provided by the ATO shows that as at 6 February 2004, the company owed the Commissioner $64,229.70 for its outstanding taxation liabilities including interest. The financial statements for the company as at 30 June 2003 also disclosed that the company had a deficiency of assets to liabilities of approximately $50,000. Again, the company's taxation liabilities as disclosed in the balance sheet as at 30 June 2003 substantially understated the company's liabilities. According to the account history provided by the ATO as at that date, the company had taxation liabilities including a liability for interest of $61,855.80. The balance sheet understates those liabilities by almost $35,000.

5 I am satisfied that at the date both of the impugned payments, namely 9 December 2003 and 8 July 2004, the company was insolvent. The Commissioner does not dispute that the transaction resulted in his receiving from the company more than he would receive from the company in respect of the company's taxation liabilities if the transaction were set aside, and he was required to prove the debt in the winding-up of the company. That is to say, he does not contest that the payments had a preferential effect.

6 The Commissioner has filed an interlocutory process. He claims that Mr David Eric Stevenson is liable to indemnify him pursuant to subs 588FGA(2) of the Corporations Act in respect of any loss or damage which he will suffer as a result of the making of the orders sought by the liquidator.

7 Mr Stevenson, in the course of his submissions, did dispute that the payments made to the Commissioner had a preferential effect. He submitted that he did not intend to give the Commissioner any preference, and that he was not aware that he was doing so. However, his belief about those matters, however genuinely held, is not the relevant question on the present application. It is clear from the statement of affairs which Mr Stevenson prepared that the company did have creditors other than the ATO. I would also infer that that was so from the company's balance sheet as at 30 June 2004. That balance sheet was prepared shortly before the company went into liquidation.

8 The liquidator has collected only minimal receipts, totalling $497.49, during the course of the liquidation. He has paid some of the expenses of the liquidation from those receipts. Otherwise, it appears that there is no money available to pay any of the creditors. Accordingly, if I accept that the Commissioner is not the only creditor of the company, it necessarily follows that the payment received by the Commissioner does have a preferential effect and is an unfair preference within the meaning of s 588FA. I do accept that there are other creditors, although it appears that the Commissioner is the major creditor.

9 No defence was advanced by the Commissioner pursuant to s 588FG of the Corporations Act. That is to say, the Commissioner does not contend that he had no reasonable grounds for suspecting that the company was insolvent at the time the payment was received and that a reasonable person in his circumstances would have had no such ground for so suspecting. I do not understand Mr Stevenson to contend to the contrary. Rather, his contention was that the Commissioner always knew of the company's circumstances, and that he should not be blamed for paying the Commissioner when the Commissioner was prepared to receive the payment knowing of the company's circumstances.

10 The evidence read by the Commissioner shows that the payments received in December of 2003 and July 2004 were applied towards amounts owing from 2001 and 2002. Clearly there were grounds for the Commissioner to suspect the company was insolvent.

11 It is for these reasons that the Commissioner did not dispute that the liquidator is entitled to the amounts claimed. The amount claimed with interest to date totals $32,504.34. There will be judgment for the plaintiff against the defendant in the amount of $32,504.34, inclusive of interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW). The plaintiff is also entitled to an order that the defendant pay his costs.

12 Section 588FGA(1) applies where an order is made under s 588FF against the Commissioner because of the payment of an amount in respect of certain income tax liabilities (see s 588FGA(1)). The Commissioner seeks an indemnity totalling $2,704.41 in respect of the first impugned payment of $3,000, and $18,009.60 in respect of the second impugned payment of $25,375. Those are the amounts of taxation liabilities falling within s 588FGA(1) for which indemnity is sought.

13 Interest on those amounts today brings the total amount of the Commissioner's claim for indemnity to $23,805.01.

14 Subsection 588FGA(2) provides:

"Each person who was a director of the company when the payment was made is liable to indemnify the Commission in respect of any loss or damage resulting from the order."

15 The order referred to is in this case the order under s 588FF which the liquidator obtains against the Commissioner.

16 It is not a defence to a claim under s 588FGA that the director acted honestly when he made the payment. It is not a defence that he acted reasonably, or that he thought that he was doing the right thing in using the company's money to pay the principal creditor. He did not have reasonable grounds to expect that the company was solvent when it made the payments, and would remain so (s 588FGB(3)). Notwithstanding the matters which Mr Stevenson has advanced to demonstrate that he acted both honestly and reasonably in the circumstances in which he found himself, there is no defence to the Commissioner's claim for indemnity.

17 In his interlocutory process, the Commissioner sought an order not only that the respondent indemnify him against his liability to pay costs to the liquidator, but also that he be indemnified for the costs the Commissioner incurred in defending the liquidator's claim. It is clear that the latter claim is not a claim for indemnity in respect of loss or damage resulting from the order which I will make in favour of the liquidator. The Commissioner did not press for the latter relief.

18 However, the Commissioner is entitled to an indemnity in respect of his liability for costs to the liquidator, and he is entitled to an order for costs of the interlocutory process. Mr Stevenson deposes that he has no resources to meet any such order for indemnity. However, that is not a sufficient reason for not making the order sought.

19 For these reasons, I order that judgment be entered for the plaintiff against the defendant in the sum of $32,504.34. I order that the defendant pay the plaintiffs costs of the proceedings. On the interlocutory process of the Commissioner of Taxation, I make a declaration in accordance with paragraph one of the interlocutory process. I order that judgment be entered for the Commissioner of Taxation against Mr David Eric Stevenson in the sum of $23,805.01. I make an order in accordance with paragraph 3 of the interlocutory process. I order that the respondent to the interlocutory process pay the Commissioner of Taxation's costs of the interlocutory process. The exhibits may be returned after 28 days.

Postscript

20 Mr Stevenson did not seek an order under s 1318 of the Corporations Act for the grant of relief from his liability under s 588FGA on the ground that he had acted honestly and ought fairly to be excused. He appeared in person. Although the matter was not argued, I have considered for myself whether he could be entitled to relief under that section. The section empowers the Court to relieve persons specified in s 1318(4), including directors, if a civil proceeding is brought against them for “negligence, default, breach of trust or breach of duty”. The claim against Mr Stevenson under s 588FGA was not of that kind. It arose simply from the fact of his holding office as a director and the unavailability of the defences in s 588FGB. Accordingly, I did not direct a stay of entry of the orders made on the hearing of the application.

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