Commissioner for Act Revenue v Highrise Concrete Contractors (Aust) Pty Ltd
[2014] ACTSC 407
•21 November 2014
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Commissioner for ACT Revenue v Highrise Concrete Contractors (Aust) Pty Ltd |
Citation: | [2014] ACTSC 407 |
Hearing Dates: | 20, 21 October 2014 |
DecisionDate: | 21 November 2014 |
Before: | Mossop M |
Decision: | See [86] |
Category: | Principal Judgment |
Catchwords: | CORPORATIONS – Application to adjourn an application to wind up company in insolvency – where tax liabilities remain unpaid – whether company is solvent but for the tax liabilities – whether the company has an arguable claim for review of the tax debts – whether discretion should be exercised to grant an adjournment |
Legislation Cited: | Corporations Act 2001 (Cth) Income Tax Assessment Act 1936 (Cth) |
Cases Cited: | Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 Bhagat v Capital Global Custodians Ltd [2002] FCAFC 51 |
Parties: | Commissioner for Australia Capital Territory Revenue (Plaintiff) Highrise Concrete Contractors (Aust) Pty Ltd ACN 088 058 084 (Defendant) |
Representation: | Counsel: Mr A Spencer (Plaintiff) Mr A O’Brien (Defendant) |
| Solicitors: ACT Government Solicitor (Plaintiff) Swaab Attorneys (Defendant) | |
File Numbers: | SC 100 of 2014 |
Introduction
By an Originating Process filed on 13 March 2014 the plaintiff (the Commissioner) applies for an order under ss 459P and 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act) that the defendant (Highrise) be wound up. The application under s 459P is based on Highrise’s failure to comply with a statutory demand. The application under s 461(1)(k) asserts that it is just and equitable that Highrise be wound up. The Originating Process was amended on 17 September 2014 to seek, in addition, an order granting of leave nunc pro tunc pursuant to s 459P(2)(a) to permit the Commissioner to make the application. Ultimately this was not pressed as the parties accepted that such leave was not necessary.
By interlocutory process dated 22 September 2014 Highrise seeks an order that the hearing of the winding up application be adjourned until 14 days after the Appeal Tribunal of the Australian Capital Territory Civil and Administrative Tribunal (ACAT) gives its decision in proceedings AA14/28 (Appeal Proceedings). It also seeks an order extending the period within which the winding up application must be determined. The adjournment was sought under ss 459A or 467 of the Corporations Act.
Highrise also sought, by interlocutory process dated 1 May 2014, an order under s 459S of the Corporations Act giving leave to Highrise to oppose the application for winding up on the ground that there is a dispute regarding the debt the subject of the statutory demand to which the proceedings relate.
As it was ultimately argued before me, the outcome of the proceedings depends upon the success or otherwise of Highrise’s application for an adjournment. Highrise accepted that if its application for an adjournment was not successful then the statutory provisions relating to its tax liabilities meant that it could not dispute the existence of the debt and displace the presumption of insolvency arising from the failure to comply with the statutory demand.
I had previously extended the time for the determination of the winding up application under s 459R of the Corporations Act. Following the reservation of my decision, I further extended the time until 30 November 2014.
Assessed tax liabilities
Highrise is presently subject to assessments under tax laws by both the Commissioner and the Commonwealth Deputy Commissioner of Taxation. The history and present status of those tax liabilities are as follows.
ACT payroll tax assessments
Highrise was incorporated in 1999. It carried out the business of concrete contracting until December 2011, at which point it ceased taking on new projects. There is some evidence that it continued to carry on work up until April 2013. Some of its activities related to projects located in the Australian Capital Territory. By 2012, Highrise had failed to register for payroll tax as required by s 86 of the Payroll Tax Act 2011 (ACT). It also failed to lodge payroll tax returns or pay payroll tax from August 2006 to February 2011. Highrise then failed to comply with several notices issued pursuant to s 82 of the Taxation Administration Act 1999 (ACT) (TA Act 1999). Section 82 of the TA Act 1999 permits the Commissioner to serve a notice on a person requiring, inter alia, the person to provide the Commissioner with information or to produce documents or records in the person’s control.
On 13 March 2012 the Commissioner issued an assessment (the Assessment). The assessment was for amounts due as at 29 February 2012, referable to unpaid payroll tax for the period between 1 July 2005 and 29 February 2012, penalty tax and interest. The amount assessed in the Assessment was $678,177.26. Highrise did not pay the amount identified in the Assessment.
On 3 December 2012, Highrise commenced proceedings in the ACAT for review of the Assessment. Shortly before the matter was listed for hearing, additional evidence was served by the Commissioner. This led to Highrise seeking that the hearing date be vacated and the proceedings adjourned. The Commissioner did not oppose the adjournment. The application for an adjournment was refused, although the evidence does not disclose the reasons for that decision. The proceedings were heard by the ACAT on 25 and 26 June 2013.
On 17 October 2013 the Commissioner served a statutory demand dated 11 October 2013 (the Demand) based on the Assessment for an amount of $781,872.40.
By Originating Process filed on 1 November 2013, Highrise applied to the Supreme Court of New South Wales to set aside the Demand under s 459G of the Corporations Act. Highrise’s application to set aside the Demand was fixed for hearing on 5 March 2014. On that date, Highrise consented to orders dismissing its Originating Process and ordering it to pay the Commissioner’s costs of the proceedings. Those costs remain unpaid. They have not yet been subject to formal assessment. While the estimates of the parties varied, those costs are at least $18,000.
The ACAT, which had reserved its decision on Highrise’s application in June 2013, delivered its decision on 23 May 2014. The reasons for the 11 month delay in giving its decision are not explained by the evidence.
On 26 June 2014 Highrise appealed from the decision of the ACAT to the Appeal Tribunal of the ACAT (Appeal Tribunal). That appeal was on two grounds. The first was that the ACAT had failed to accord Highrise procedural fairness by reason of the refusal of an adjournment of the hearing in circumstances where the Commissioner had filed and served a lengthy affidavit without leave of the ACAT or consent of Highrise shortly before the hearing was due to commence. The other ground was that the ACAT had failed to properly exercised its function because it had acted under dictation in adopting the practice and procedure of the Commissioner in relation to requiring the taxpayer to produce source documents, rather than deciding for itself whether or not the assessment was excessive.
The order sought in the appeal to the Appeal Tribunal is that the decision of the ACAT be set aside and the application be determined by the Appeal Tribunal or be remitted for hearing again before the ACAT. The Appeal Tribunal heard the appeal on 25 September 2014 and reserved its decision. That decision remains reserved.
Commonwealth income tax assessments
On 11 November 2013 the Commonwealth Deputy Commissioner of Taxation (Deputy Commissioner) issued amended assessments for income tax payable by Highrise in relation to the years ended 30 June 2009, 2010 and 2011 and an assessment for the year ended 30 June 2012. At the same time, the Deputy Commissioner issued notices of assessment for “shortfall penalties” for 2009, 2010 and 2011. On 8 February 2013 the Deputy Commissioner issued a further amended assessment in respect of the 2008 financial year. Highrise objected to the assessment and amended assessments. Those objections were disallowed. The total of the amended assessments and penalties said to be due for the financial years ending 2008, 2009, 2010, 2011 and 2012 is $1,020,295.82.
Highrise filed Applications for Review dated 4 December 2013 and 30 May 2014 in the Administrative Appeals Tribunal (AAT) in relation to the decisions to disallow the objections. Those applications for review were dismissed on the application of the Deputy Commissioner by reason of the failure of Highrise to comply with a direction of the Tribunal. On 10 October 2014 orders were made by the AAT reinstating Highrise’s applications for review. These orders were made as a consequence of an application by Highrise.
Submissions
Highrise seeks an adjournment of the winding up application. Highrise accepted that if that application is unsuccessful, then the orders sought by the Commissioner will be made. That is because Highrise accepted that tax debts are conclusive and recoverable, notwithstanding the pendency of any objection or application for review. In relation to ACT payroll tax, the relevant legislative provisions are contained in the TA Act 1999. Section 134 of the TA Act 1999 provides that the production of a notice of assessment is conclusive evidence of the due making of the assessment and that the amount and all the particulars of the assessment are correct. Section 105 provides that the fact that an objection or review is pending does not affect the recoverability of the amount of tax liability assessed. The combined effect of these provisions is that Highrise is not able to contest or dispute on the merits whether the tax and penalties assessed by the Commissioner are truly payable.
Similarly, in relation to the Commonwealth taxation liabilities, s 177 of the Income Tax Assessment Act 1936 (Cth) (ITA Act) provides that the production of an assessment under the ITA Act is conclusive evidence of the due making of the assessment and the particulars of the assessment are correct. The amount assessed is a debt due to the Commonwealth: Taxation Administration Act 1953 (Cth) (TA Act 1953), Schedule 1, s 255-5. The fact that an objection or review is pending does not affect the recoverability of the amount of tax liability assessed: TA Act 1953 ss 14ZZM and 14ZZR.
Highrise then pointed to the authorities which recognise that a court has power to adjourn enforcement proceedings in circumstances where there are proceedings on foot to review assessment decisions. In particular, Highrise points to the decision in Clyne v Deputy Commissioner of Taxation (1982) 43 ALR 342 at 344, Seller v Deputy Commissioner of Taxation (2011) 282 ALR 80 at [32]-[34] and the two decisions of Robertson J in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd [2012] FCA 363 (Bayconnection No 1) and Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (No 2) [2013] FCA 208 (Bayconnection No 2) as reflecting the approach to be taken by the Court in a case like this.
Relying on these authorities, Highrise then made the following submissions in support of its application for an adjournment.
(a)Highrise is solvent apart from the two challenged tax liabilities.
(b)The appeal pending in the ACAT in relation to the ACT payroll tax debt is an arguable one, as is the application for review pending in the AAT in relation to the income tax debts.
(c)Highrise has ceased trading, has no employees and is not accruing further debts.
(d)There is no prejudice to the Commissioner and, in particular, because the application for winding up has been filed with the Court, relation back periods are preserved for the benefit of the Commissioner.
(e)Highrise at this stage only seeks a short adjournment until the Appeal Tribunal delivers its decision.
The Commissioner opposed the granting of any adjournment. It had offered to consent to an adjournment of the application if Highrise paid into Court the amount the subject of the statutory demand, but Highrise did not take up that offer or propose any alternative means of securing the Commissioner’s interest.
The Commissioner pointed to s 286 of the Corporations Act, which obliges a company to keep written financial records that correctly record and explain its transactions, financial position and performance which would enable true and fair financial statements to be prepared and audited. It submitted that Yates J in Deputy Commissioner of Taxation v Caporale Group Pty Ltd [2011] FCA 1189 (Caporale) and Robertson J in Bayconnection No 1 both approached the question of whether a winding up application should be adjourned on the basis that it is a precondition that the company establish that it is solvent, apart from the disputed taxation liabilities. It submitted that the onus in that exercise falls upon Highrise to demonstrate solvency. It then pointed to several transactions material to the question of solvency in relation to which the records put before the Court and the explanations given of those transactions by the only witness called by Highrise, Mr Joseph Bassil, were inadequate. In particular, it pointed to the following transactions.
(a)A liability arising out of a bill acceptance/discount facility granted by the St George Bank to Highrise, the proceeds of which were paid for the benefit of other companies related to Tony Bassil, the director of Highrise, which was taken out at a time when Highrise was not trading and in relation to which the interest payments are met by loans from other companies.
(b)A transaction described as a “debt-equity swap” carried out while these proceedings were on foot, which had the effect of converting approximately $2.4 million in liabilities to related companies to shares in Highrise held by St George Concrete Pumping Services Pty Ltd (SGCPS). The Commissioner submitted that the documentary evidence before the Court was not sufficient to explain this transaction for which no commercial rationale could be provided by Joseph Bassil.
(c)The continued incurring of costs related to the conduct of these proceedings, the proceedings in the ACAT and the proceedings before the AAT.
It therefore submitted that Highrise has not demonstrated that it would be solvent apart from the challenged tax liabilities.
In relation to the challenge to the income tax assessments, the Commissioner submitted, based on the decision in Bhagat v Capital Global Custodians Ltd [2002] FCAFC 51 (Bhagat), that the assertions made in the objections to the assessments and the material in the Statement of Facts, Issues and Contentions filed for the purposes of the AAT applications were not sufficient to establish a reasonably arguable case for review of those decisions.
The Commissioner also made additional submissions about various aspects of the accounts that were disclosed by the evidence and pointed to the fact that the apparently unprofitable businesses of Highrise and SGCPS have been now taken over by new companies bearing very similar names, Highrise Concrete Contractors Pty Ltd and St George Concrete Pumping Pty Ltd.
Principles to be applied
The general principles disclosed by the authorities in relation to the discretion to stay execution of a judgment debt based upon a taxation assessment were summarised by a Full Court of the Federal Court in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation (2013) 211 FCR 274 (Southgate) at [77], where the Court said:
[77]It is appropriate if we say something further regarding the criteria which may apply in determining whether or not execution of a judgment debt should be stayed. We agree with the observations of Hutley JA in Mackey at 289 that the discretion to grant a stay of the execution of a judgment debt based upon a taxation assessment involves “an open-ended discretion” and that it “is not possible to work out in advance all possible bases for the exercise of such a discretion and it would not be proper even to attempt to do so”. Bearing in mind those salutary words and without wishing to be prescriptive or exhaustive, we consider that it is possible, however, to extract from the caselaw the following general principles which guide the exercise of that discretion:
(a)the power to grant a stay should be exercised sparingly and the taxpayer bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances;
(b)great weight must be given to the clear legislative policy manifested in provisions such as ss 14ZZM and 14ZZR of the TAA which give priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot. The Commissioner is placed by the legislation in a position of special advantage and is generally free to pursue recovery proceedings despite the pendency of Part IVC proceedings;
(c)the merits of pending Part IVC proceedings may be a relevant consideration to be taken into account in the exercise of the discretion, but the court should not attempt to determine the merits unless it has sufficient material before it to do so and it should avoid speculation;
(d)in cases where a judge is unable to form even a tentative view of the strength of Part IVC proceedings, it is unlikely that the judge’s discretion in refusing a stay will miscarry by reason only of the judge being unable on the material before him or her to reach a view as to the taxpayer’s prospects of success in having the assessment overturned;
(e)it is too narrow a view of the discretion to grant a stay of proceedings or execution merely because Part IVC proceedings are pending, or because on review of those proceedings there appears to be an arguable case or complex questions to be determined by the AAT or the Court;
(f)that is not to say, however, that the outcome of Part IVC proceedings has to be certain in the sense that they are bound to succeed or fail. That puts the bar too high;
(g)in cases where the Court considers that it is in a position to assess the merits of pending Part IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits. But the taxpayer needs to have more than merely an arguable case;
(h)similarly, more weight would be given to the merits factor if the case is one where the Commissioner has abused his position or it is clear that the Commissioner is endeavouring to collect tax in defiance of a decision of the High Court or other superior court which is precisely in point;
(i)due acknowledgment should be given to the asperity with which provisions such as ss 14ZZM and 14ZZR may operate, but in appropriate circumstances a court might consider that a stay is warranted in cases of extreme hardship to a taxpayer, noting however that:
(i) the mere obligation to pay income tax of itself does not impose extreme hardship; and
(ii) the possibility that the taxpayer may be bankrupted is generally not of itself an extreme hardship, however, different considerations may arise if, for example, it is demonstrated that the execution of a judgment debt would deprive the taxpayer of the financial resources needed to prosecute extant Part IVC proceedings;
(j)irrespective of the merits of pending Part IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax; and
(k)other considerations may need to be taken into account in determining whether to exercise the discretion in a particular case, such as any conduct on the part of the taxpayer or the Commissioner which impacts upon the efficient and expeditious conduct of Part IVC proceedings.
Southgate was a case arising in slightly different circumstances to the present case, in that what was sought was a stay of the execution of the judgment rather than an adjournment of a winding up application. The parties in the present case proceeded on the basis, consistent with the concession made by the Deputy Commissioner of Taxation in DCT v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 (Broadbeach) at [13], that, notwithstanding the presumption of insolvency that arises by reason of the non-compliance with the statutory demand, upon the hearing of a winding up application the Court can properly have regard to whether the taxpayer has a “reasonably arguable” case in proceedings to review a tax liability. That is notwithstanding the fact that the existence of such review proceedings does not demonstrate that there is a “genuine dispute” as to the amount or existence of the debt for the purposes of s 459H of the Corporations Act or provide “some other reason” for setting aside the statutory demand: see Broadbeach.
In the case of winding up applications, three cases were discussed in some detail in submissions: Caporale; Bayconnection No 1; and Bayconnection No 2.
In Caporale each applicant for a stay of winding up proceedings had failed to comply with a statutory demand from the Deputy Commissioner of Taxation. Each applicant for a stay had commenced proceedings in the AAT to review the tax debt. The companies argued that solvency was not an issue so long as their applications for review were found to be arguable. The Commissioner argued that (a) if the company was, apart from the tax debt, insolvent then a winding up order should be made and that the companies had not discharged the onus of demonstrating solvency; and (b) the companies had not demonstrated that they had a reasonably arguable case for the review of the tax debts. Yates J accepted the submissions of the Deputy Commissioner, saying:
22.While the existence of the appeal proceedings is plainly a relevant and important factor to be taken into account in considering the adjournment applications, it is not the only factor. I do not accept the defendants’ submission that the question of their solvency is “not an issue”. In my view, it too is a relevant and important factor to be taken into account. Indeed, it is at the forefront of considerations.
23.In this regard, there is little point in putting off the winding up applications to a time after the determination of the appeal proceedings, or even for a shorter period of time, if the defendants are insolvent, regardless of the tax debts they owe. In the absence of appropriate evidence establishing their solvency, or their solvency but for the tax debts, the Court is required to presume, in the present circumstances, that the defendants are insolvent.
24.By way of amplification of the circumstances in the present case, none of the defendants was able to provide any evidence of solvency by way of financial records that recorded or explained its transactions and financial position and performance: see s 286(1) of the Act. I simply have no idea of the financial circumstances of each defendant other than that it is presumptively insolvent and owes a significant debt to the plaintiff.
In relation to the prospects of the review proceedings, his Honour said (at [26]):
The only material I have before me is evidence of the fact that the appeal proceedings have been commenced and that the defendants have filed the evidence on which they propose to rely. However, those facts alone provide no basis on which I could conclude that each defendant has a reasonably arguable case in respect of its appeal in the AAT.
In Bayconnection No 1 Robertson J stayed an application to wind up a company in insolvency because he was of the view that there were reasonably arguable review proceedings on foot and the company had no third-party creditors apart from the Deputy Commissioner. His Honour had been invited to adopt the same approach as that of Yates J in Caporale. His Honour summarised the approach to such applications at [26] as follows:
There is no doubt that there is a discretion and that there are principles relevant to the exercise of that discretion. A principle of great importance is that the collection of the revenue should not be prejudiced. But there may be circumstances where an application to wind up the company on the grounds of insolvency should be adjourned until the outcome of Pt IVC proceedings is known. The circumstances in which such a discretion may be exercised include where the collection of the revenue is not prejudiced or any such prejudice is insubstantial, where a debtor company has a reasonably arguable case in proceedings under Pt IVC of the Administration Act and where those proceedings are soon to be heard.
His Honour reviewed the evidence and found that the review proceedings were reasonably arguable. Significantly, his Honour’s assessment of the position was influenced by the fact that there was no objection to the material put forward by the company and no cross-examination upon the affidavit material, which was designed to demonstrate that the company did not make any sales or claim any credits in the period in question and hence did not owe any GST to the Deputy Commissioner. His Honour granted an adjournment of the winding up proceedings. His Honour’s reasoning was essentially as follows.
(a)While the legislative policy in s 14ZZM of the TA Act 1953 was to be given substantial weight in exercising the discretion under s 459R of the Corporations Act, no prejudice to the revenue was identified in terms of the timing of recovery or otherwise.
(b)The company had a reasonably arguable case in proceedings which would be heard before long.
(c)Although the company was insolvent, it had no third-party creditors apart from the Deputy Commissioner. The evidence disclosed that it had a substantial liability to the sole director of the company, the challenged tax liability and no others. His Honour was so satisfied notwithstanding that the company had not provided the “fullest and best” evidence of its financial position. His Honour doubted whether the fullest and best evidence principle applied where the evidence was unchallenged. His Honour emphasised that it was “a tool to be used, where appropriate, by the finder of fact to evaluate the balance of probabilities.”
(d)The only or substantial effect of refusing the application for an adjournment would be that control of the company would pass to the liquidator, who may choose not to pursue the review proceedings which he had found to be reasonably arguable.
Bayconnection No 2 arose after the Deputy Commissioner’s objection decision had been affirmed by the AAT. Robertson J then considered whether or not the grounds of appeal, which were now limited to a question or questions of law, were reasonably arguable. His Honour found that those grounds were not reasonably arguable or, alternatively, that if they were reasonably arguable, then the clear legislative policy relating to tax debts outweighed any claim to a further adjournment of the winding up proceedings.
Having regard to the similarity between the Commonwealth and ACT provisions relating to recovery pursuant to tax assessments, I consider that the principles outlined in these cases Commonwealth are equally applicable in relation to the ACT tax liabilities assessed by the Commissioner. The Court has power to grant an adjournment of the winding up application based on failure to comply with a statutory demand arising out of a taxation debt pending review proceedings under tax legislation. That discretion to adjourn the winding up application must pay due regard to the legislative policy inherent in the statutory provisions which make tax liabilities enforceable in such circumstances and may only be exercised in circumstances where, but for the disputed taxation liability, the company has established that it would be solvent. Further, the company must demonstrate that it has at least an arguable case in review proceedings and, where that threshold is met, the Court may consider more generally the merits of that application for review where they can be determined.
Consideration
The submissions of Highrise were essentially directed at the proposition that this case was analogous to Bayconnection No 1, in that it was only the disputed tax debts that would lead to insolvency. The evidence relied upon by Highrise to establish its financial position was that in the affidavits of Joseph Bassil dated 25 June 2014 and 15 October 2014. Joseph Bassil is Tony Bassil’s son. He manages Highrise on behalf of Tony Bassil and is also involved in the management of SGCPS. In his affidavit of 25 June 2014 he provides the following summary of Highrise’s financial position:
7 In summary, the financial position of Highrise is as follows:
(a)It has assets amounting to approximately $217,983.80;
(b)It has admitted liabilities amounting to approximately $18,000;
(c)There are income and payroll tax debts which are presently in dispute;
(d)Putting aside the disputed tax debts referred to above, and taking into account the matters referred to in this affidavit, it has a surplus of assets over liabilities; and
(e)There are no debts that it is not able to meet as and when they fall due.
Up until January 2012 data was entered into the company’s MYOB accounts by a bookkeeper. Since that time Joseph Bassil has been entering the MYOB data himself. His evidence was that from his observations of the bookkeeper and from his own practice he believes that the MYOB records relating to Highrise are an accurate record of financial information, such as creditors and debtors of Highrise.
The most significant features of the financial position of Highrise to which the Commissioner drew attention were the liabilities under the bill acceptance/discount facility from St George Bank and the debt-equity swap, which had the effect of removing liabilities of $2.4 million from the books of the company.
Highrise bears the burden of persuading me that I should grant the adjournment. In this context it bears the burden of proving that it would be solvent, but for the two disputed tax debts. In the deciding whether or not Highrise would be solvent, I can have regard to the fact that it was within Highrise’s capacity to put forward a complete explanation of the significant transactions highlighted by the Commissioner and it did not do so. In this regard I adopt the principles identified by Weinberg J in AceContractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 (Ace Contractors) at [44], relevantly:
· The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J.
· In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
· Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.
As Robertson J pointed out in Bayconnection No 1, the fullest and best evidence principal is a tool that may be used by the finder of fact to evaluate the balance of probabilities.
Similarly, where the solvency of Highrise is dependent upon a transaction with a related company or companies, solvency of Highrise cannot be established if the effect of the transaction with the related company is to render the related company insolvent. In Hall v Poolman (2007) 215 FLR 243 Palmer J was dealing with the position of a group of companies. His Honour said:
64It is trite that the test of solvency of a company under CA s.95A is, first and last, a question of fact and that the Court approaches that question as a matter of commercial reality. If one member of a group of companies has, as a matter of commercial reality, ready recourse to the assets of another member of the group for payment of the first company’s debts as they fall due, and that recourse will not result in the insolvency of the second company or in merely delaying the insolvency of the first, then the Court may have regard to that fact in assessing whether the first company is able to pay its debts as they fall due: Lewis v Doran (2004) 50 ACSR 175 at [116].
...
66If commercial reality requires the Court, in assessing the solvency of company A in a group, to have regard to the assets of assets in company B in the group, commercial reality will also require the Court to look at the liabilities of company B. Company B’s liabilities may be such that it cannot use its assets to assist company A without becoming insolvent itself. In such a case, company B’s assets cannot be regarded as available to pay company A’s debts: the law does not condone robbing Peter to pay Paul.
Thus, in so far as Highrise is reliant upon support from other companies that can be identified as being part of a group of companies, then it is necessary to assess the state of solvency of those other companies.
Issues
In the light of the above principles and the issues identified by the parties, the balance of these reasons will be directed to addressing the following issues.
(a)How should be the liability to St George Bank be treated for the purposes of assessing solvency?
(b)How should the “debt-equity swap” be treated for the purposes of assessing solvency?
(c)Does Highrise have an arguable claim for review of the payroll tax debt?
(d)Does Highrise have an arguable claim for review of the income tax debt?
(e)Should the discretion be exercised to grant an adjournment?
(a) How should be the liability to St George Bank be treated for the purposes of assessing solvency?
Highrise has a liability to the St George Bank as a result of obtaining from the bill acceptance/discount facility the amount of $2,136,000. The purpose of that facility was said to be “Payout loans held with Arab Bank Australia Ltd”. That was explained by Joseph Bassil in his affidavit. He said that funds from the facility were applied jointly with funds from other loans, to which Highrise was not a party, towards the payment of a sum in excess of $11 million to Arab Bank Australia Ltd, as well as various other liabilities, some of which Highrise was not a party to.
When that facility was offered by the bank, it was offered subject to a charge over the assets and undertaking of Highrise and various proposed third-party securities. The offer of the facility was dated 7 August 2013. It was accepted on 8 August 2013. The first draw down date was 28 August 2013. The facility therefore will expire on 28 August 2015.
Although in his affidavit Joseph Bassil says that he was “currently searching for documents relating to the loans to which the St George Bank facility funds were applied and will provide them when I locate them”, no additional documents were produced and Joseph Bassil could not give a satisfactory explanation as to why they were not located or produced.
He gave evidence that he was informed by his father, Tony Bassil, to whom the various bank documents were addressed, that it was the intention of Comlin Holdings Pty Ltd (Comlin Holdings), a company also controlled by Tony Bassil, that all monies in respect of the St George Bank facility would be paid by Comlin Holdings even though Highrise was the borrower and Comlin Holdings was simply a guarantor. His evidence was that he did not know why Highrise was named as the borrower.
Included in the evidence was a letter from Tony Bassil dated 19 June 2014 stating that Comlin Holdings accepted liability for and agreed to pay all amounts that fall due in respect of the loan facility to which the facility offer letter related, notwithstanding that Comlin Holdings was the guarantor only. A company search for Comlin Holdings Pty Ltd identifies Tony Bassil as the sole director and shareholder of the 100 $1 shares. There is no other evidence about the assets and liabilities of Comlin Holdings or its state of solvency.
Highrise submits that the liability to the St George Bank is not a matter of significance for the purposes of determining Highrise’s solvency because it is a liability which is not presently due and Comlin Holdings has undertaken to pay amounts owing by Highrise.
The evidence of Joseph Bassil was that the funds which are required to pay the interest payments were provided by related companies (not identified in the records in evidence) and treated as loans from those companies to Highrise, although in most cases it is not possible to identify from the evidence which company made the payment. In so far as they are treated as loans then, prima facie, Highrise is continuing to accrue liabilities which it has no ability to pay.
There is a final point about the banking and other records which show the payments by Highrise to the St George Bank and monies coming in to meet that liability. It is that the volume of transactions occurring through the bank accounts is inconsistent with the relatively simple picture painted by Joseph Bassil in his affidavit of a non-trading entity simply seeking to recover outstanding debts of modest proportions. While the monthly payments made out to St George Bank are around $9000 and, if that was the only activity of the company, one might expect payments into the account from related entities of that order in order to meet those liabilities, the volume and quantum of transactions going through the account appears to be substantially greater. There are significant volumes of money going in and out of the account. In many cases it is not possible to identify from the records provided to whom and from whom the amounts are paid. Some amounts coming into the account appear to be payments from building contractors who do not owe money to Highrise, but instead to Highrise Concrete Contractors Pty Ltd. In the accounting records the money coming in and going out of the accounts appears to be treated as loans to and from unidentified related parties. While payments to St George Bank in the eight and a half months from 27 August 2013 until 13 May 2014 totalled approximately $68,020.86, a total of $487,830.75 was credited to the account and some $544,107.08 was debited to the account. No commercial purpose was identified for paying into the accounts of Highrise money in excess of that which was required to service the St George Bank liabilities.
In summary the position is:
(a)the reason that the company took on the liability to the St George Bank in circumstances where it was not trading and where the loan was not for the benefit of the company is unexplained;
(b)the loan is not currently repayable;
(c)the company has no assets of its own to meet either repayment of interest or of the principal when it becomes due;
(d)to date interest payments have been met by Comlin Holdings or one or other companies associated with Tony Bassil;
(e)while Tony Bassil (the director of Comlin Holdings and of Highrise) has indicated that Comlin Holdings will continue to meet the obligations under the loan and it, as guarantor, has an interest in doing so, there is no instrument to that effect;
(f)there is no evidence as to the asset or cash flow position of Comlin Holdings or whichever other company provided funds;
(g)there is no clear evidence about the nature of the group of companies associated with Tony Bassil or the financial relations between those companies; and
(h)there are significant additional flows of funds into and out of the bank account of Highrise which are inconsistent with it being a non-trading entity whose activities are being wound down, the commercial purpose of which remains unexplained.
In my view, the evidence given in relation to the St George Bank liability does not establish that Highrise is solvent. The prima facie position is that it has a very significant liability, incurred for no apparent commercial reason, which it will be liable to pay in 2015. It has ongoing interest obligations which are only paid with funds provided by other unidentified entities or Comlin Holdings, which are treated as loans from those entities. There is no evidence at all about the state of solvency of Comlin Holdings. It is therefore not possible to assess whether the maintenance of payments by Highrise to the St George Bank has or will render Comlin Holdings or any other entity insolvent.
Further, the unusual nature of the transaction and the absence of any commercial explanation for the transaction is a matter which, in my view, gives rise to concern as to why Highrise was exposed to this liability, and is a matter which weighs against the further adjournment of the winding up proceedings. So too are the other unexplained transactions shown in the accounts which also appear to serve no commercial purpose so far as Highrise is concerned.
(b) How should the “debt-equity swap” be treated for the purposes of assessing solvency?
The accounts for Highrise in the years from 2006 show the gross trading income, profit and total equity as follows.
2006 2007 2008 2009 2010 2011 2012 2013 2014 Gross trading income 4,298,848 4,965,842 3,131,427 5,226,558 3,752,189 2,582,406 - - - Profit 307,007 338,144 329,523 158,677 (565,519) (445,252) - (1,240) - Total equity 1,138,489 1,374,988 (1,361,331) (1,202,653) (1,768,172) (2,213,424) - (2,207,413) 218,541
Note that the figures given for 2013 and 2014 are not based on any finalised accounts.
In summary, since 2008 up until sometime prior to 30 June 2014 the liabilities of the company have dramatically exceeded its assets. Highrise has not taken on any new work after December 2011.
A document headed “Balance Sheet” as at June 2013 that was put into evidence showed as liabilities of Highrise “Loans-Related parties” of $2,411,503.85. The issued capital of the company was $100. The related party loans were the principal reason for the total negative equity of $2,207,413. There was no evidence as to the terms of those loans, in particular, no evidence that they were not payable or payable on demand. A document headed “Balance Sheet” for June 2014 that was put into evidence showed “Loans-Related parties” as zero but the issued capital as $2,439,596. This is what was described as the debt-equity swap. The loans to related parties have been substituted with shares in Highrise. Such a transaction is obviously of significance in the present circumstances because by removing $2.4 million of related party loans from the liabilities of Highrise it is possible to generate a positive total equity, so long as the disputed tax liabilities and the liability to St George Bank are not taken into account. Thus, at a time when Highrise has not been trading for almost three years its uniformly negative asset position is reversed and it shows a net positive equity.
Joseph Bassil’s evidence was that it was SGCPS that acquired the shares in Highrise. The explanation given by Mr Bassil of the transaction extended really only so far as identifying that SGCPS was the entity involved, and that the nature of the transaction was a purchase of shares in the defendant for a price of $2.4 million. That would involve a quantity of shares being issued to SGCPS and a debt of $2.4 million from the plaintiff to SGCPS being forgiven.
The basic logic of that transaction would depend upon there being a liability to SGCPS which could be forgiven. However, SGCPS is not demonstrated by the evidence before me to have been owed any amount by Highrise. The balance sheet of Highrise as at 30 June 2011 showed liabilities of $3.99 million as loans from related parties. The balance sheet of SGCPS as at 30 June 2011 showed no loans to Highrise as assets of SGCPS. There is no explanation as to whether or how $2.4 million in loans were made by SGCPS to Highrise. The related party loans appear to have been either loans to Highrise from other related parties or loans made by SGCPS to Highrise after June 2011 which are completely unexplained. To the extent that the loans were to other related companies it would be hard to characterise the transaction as a “swap”, in that it would involve SGCPS acquiring stock in a company for no apparent consideration and other companies forgiving their loans for no apparent consideration.
There was no explanation of any commercial purpose for the debt-equity swap. If there was a commercial purpose to the transaction then Mr Bassil, the person responsible for the management of Highrise and a person involved in the management of SGCPS was likely to know. His evidence as to why the transaction occurred did not disclose any such purpose. He suggested that it might have been undertaken upon the advice of accountants. There was no evidence or explanation as to why Tony Bassil, the director of both companies, did not give evidence.
The only documents evidencing the transaction were documents headed “Balance Sheet” for the years ending 2013 and 2014. The source of these documents was not explained. They are not, on their face, the product of an accountant or a formal record such as a tax return. In my view, the document falls into a category of documents similar to that referred to by Weinberg J in Ace Contractors as “[u]naudited accounts and unverified claims of ownership or valuation” upon which little reliance can be placed. There is no evidence as to who it was prepared by or whether it was prepared for any purpose other than this litigation. The document was disclosed by Highrise’s solicitors to the Commissioner’s solicitors two days after the end of the financial year.
The issue of shares in Highrise was not disclosed in the ASIC search dated 23 June 2014 which was in evidence. There was no evidence, other than the terms of the “Balance Sheet”, that any shares had in fact been issued. It is possible that the transaction occurred between the ASIC search on 23 June 2014 and the end of the financial year on 30 June 2014, namely, after the date of the ASIC search. If that was the case then the transaction was undertaken at a time when these proceedings were pending for no identified commercial purpose.
There was no document recording the existence of any agreement for the sale of shares and forgoing of debt.
There was no evidence of any money actually changing hands. In so far as the acquisition of shares did not involve the payment of money because the shares were not paid up, then the transaction was only achieved by exposing SGCPS to a liability to pay calls on the shares, something which, having regard to its asset position, it could not do. That is made clear by the fact that it is not trading, its business having been taken over by the similarly named St George Concrete Pumping Pty Ltd, and the following evidence of its net asset position in past years:
2006 $201,581 2007 $313,002 although subsequently prepared reports show ($1,728,243) 2008 ($3,475,289) 2009 ($2,662,549) 2010 ($2,873,000) although subsequently prepared reports show ($4,601,243) 2011 ($4,776,813)
While there was no explanation in the material before me why the assets and liabilities for the years 2007 and 2010 varied as between different versions of the accounts, the history of the net assets and liabilities of Highrise show that, after an initial period, it accumulated very substantial losses up to almost $4.8 million.
I am not satisfied that any debt-equity swap in fact occurred. If it did occur, then on the evidence before me it was a transaction with no commercial purpose, simply designed to make it appear that Highrise had a positive net asset position for the purpose of these proceedings.
I am therefore not satisfied that the question of the solvency of Highrise should be assessed without having regard to the $2.4 million of loans to related parties. The existence of those loans would, in the absence of some explanation, be indicative of insolvency.
Further, even if the transaction did occur, the nature of the transaction is such that its entry is a factor which tends against the granting of a further adjournment of the winding up application in order to ensure that there is some independent examination of the affairs of the company.
(c) Does Highrise have an arguable claim for review of the payroll tax debt?
In relation to the decision of the ACAT I am satisfied that there is an arguable ground of appeal and, if the appeal is granted, an arguable case for review. It is difficult, however, to say more about the merits of the claim because although a denial of procedural fairness is argued on the appeal, Highrise has not identified, even in a conceptual way, the additional or alternative material which it would now wish to put before the Appeal Tribunal in order to persuade it to reach a different result. That may be explicable having regard to the way in which the parties and the Appeal Tribunal have approached the appeal, in particular the absence of any submission that any denial of procedural fairness would not have made a difference to the result (cf Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145-146). However, the absence of any clear indication makes it more difficult to assess the substantive merits of Highrise upon a rehearing as compared to the results achieved at the first hearing, at which it was unsuccessful. As a consequence, for the purposes of exercising my discretion, I take into account the fact that Highrise has an arguable claim but cannot put it higher than that in favour of the company.
(d) Does Highrise have an arguable claim for review of the income tax debt?
In relation to the appeal to the Commonwealth AAT, the position is that there is very little material that would provide a basis for concluding that the application for review before the AAT is arguable.
The affidavit of Joseph Bassil contains Highrise’s Notice of Objection to the assessments for the financial years ending 2009, 2010, 2011 and 2012. It also contains the objection to the assessment for the financial year ending 2008. It appears that objections were also lodged in relation to the years ending 2006 and 2007. The ATO accepted that the assessments for 2006 and 2007 were not valid.
In relation to each of the objections for the 2008, 2009, 2010, 2011 and 2012 financial years, the objections are in similar terms putting, in effect, everything in issue and asserting:
(a)the amount of taxable income did not exceed zero dollars;
(b)the Deputy Commissioner should have been satisfied with the return of income lodged by Highrise and should not have used ATO benchmarks to calculate an amended assessment;
(c)Highrise has maintained records that record and explain all transactions and other acts engaged in by Highrise that are relevant for the purposes of the ITA Act;
(d)if Highrise did not maintain the records then the Deputy Commissioner should have been satisfied that Highrise complied with its obligations because the period of five years has passed from the date when the records were prepared or obtained;
(e)the Deputy Commissioner was not authorised to use benchmarks in order to determine taxable income or tax losses;
(f)if the Deputy Commissioner was authorised to use benchmarks then the Deputy Commissioner erred by using the wrong benchmark;
(g)the amount included in Highrise’s assessment did not represent assessable income;
(h)if it did then the additional amount was less than the sum asserted by the Deputy Commissioner; and
(i)if it did constitute assessable income then Highrise was entitled to an allowable deduction equivalent to the additional amount or some other amount.
I have not set out the terms of the Notice of Objection in full. In summary it methodically puts every aspect of the assessment in issue but does not descend to any detail or provide any supporting information which would indicate that the contentions are arguable. The document gives the impression of going through the motions so as to require the Deputy Commissioner to rationally respond to every possible argument. It did nothing to positively articulate a case in favour of revision of the assessments or provide any material that would support such a revision as a matter of fact.
The Statement of Facts, Issues and Contentions filed in the AAT in relation to the review of the 2008 assessment is of the same nature. It identifies the issues in the application in the following way:
13.Whether [Highrise] was carrying on a “Business” within the meaning of that term, as set out in section 6 of the [ITA] Act;
14.If [Highrise] was carrying on a business, as aforesaid, whether [Highrise] maintained records, in accordance with section 262A of the [ITA] Act that recorded and explained all transactions and other acts engaged in by [Highrise] that are relevant for any purpose of the [ITA] Act.
15.If [Highrise] was required to keep records for the purposes of section 262A of the [ITA] Act, whether the [Deputy Commissioner] should have been satisfied with the books and records kept by [Highrise].
16.If the [Deputy Commissioner] was not satisfied that [Highrise] kept records for the purposes of section 262A of the [ITA] Act, whether the [Deputy Commissioner] should have adopted a technique called “Benchmarking” to estimate [Highrise’s] taxable income for the year of income and, if not, should the [Deputy Commissioner] have used an alternative technique to estimate [Highrise’s] assessable income and allowable deductions for the year of income.
17.If the [Deputy Commissioner] was entitled to use Benchmarking to estimate of [Highrise’s] taxable income for the year of income, whether [Highrise] was entitled to claim an allowable deduction for tax losses brought forward from any prior year of income and to offset such losses, brought forward, against taxable income is said to have been derived [Highrise], as asserted by the [Deputy Commissioner] for the year of income.
18.Whether additional tax, in the form of interest charged by the [Deputy Commissioner], was payable by [Highrise] and, if so, what amount.
19.Whether additional tax, in the form of penalties imposed by the [Deputy Commissioner], was payable by [Highrise] and, if so, what amount.
The only additional fact of significance that were identified was that Highrise engaged Gerard Quin Accounting Services Pty Ltd to review and re-prepare the financial statements previously prepared by Highrise’s previous accountants and that the new accountant asserted he could not find any error in the accounting treatment by the previous accountants.
However, neither the objections nor the Statement of Facts, Issues and Contentions descended to specifics and hence, it is difficult to assess the arguability of the matters contended for. At the level of generality at which both the objections and the Statement of Facts Issues and Contention have been pitched, it is difficult to say that the position adopted by Highrise is not arguable, although having regard to the other evidence available on this application I could have no confidence at all that the books and records maintained by Highrise were adequate or accurate.
However, the Full Court of the Federal Court in Bhagat at [53] agreed with the proposition that the mere production of a statement of claim in an action that pleads facts which, if proved, would support the claim has long been held to be insufficient to establish that the claim has reasonable prospects of success. Further, this is not a case such as Bayconnection No 1 where there was no challenge to the factual basis put forward for the review of the Deputy Commissioner’s decision. It was very clearly put both in the course of cross-examination and submissions that the records maintained by Highrise were insufficient to explain the transactions that it entered into. Further, the proposition that the Deputy Commissioner should not have applied benchmarks to reach assessments or amended assessment was not developed by Highrise, other than by stating it as a proposition.
In those circumstances, I am not satisfied that there are reasonably arguable grounds for review of the Deputy Commissioner’s decision. In any event, even if I am wrong about that conclusion, the grounds for review do not appear to be strong and any assessment of them must necessarily involve speculation. Hence, I give them a little weight when compared with the clearly articulated legislative policy which permits recovery of the assessed tax liabilities notwithstanding the existence of review proceedings and the other factors present in this case.
(e) Should the discretion be exercised to grant an adjournment?
The submissions of Highrise were that:
(a)the accounts of the company as explained by Mr Bassil showed a surplus of assets over liabilities;
(b)the substantial liability to the St George Bank was not repayable until August 2015 and the monthly repayments had, as a matter of fact, been consistently met by one or more related parties;
(c)the Court should accept the “debt-equity swap” as having extinguished any prior liabilities to any related companies; and
(d)both claims for review of disputed tax debts were arguable.
As will be apparent from the above, I do not accept that Highrise has established that it would be solvent but for the disputed tax debts. That is because I cannot be satisfied that the St George Bank liabilities will be met through payments made by other solvent related entities and I am not satisfied that the debt-equity swap is a transaction which actually occurred. Further, although I am satisfied that the ACAT appeal is arguable I am not satisfied that the AAT appeal is arguable and, even if it was, would place little weight on its existence in the exercise of my discretion.
The case is one which is not analogous to Bayconnection No 1. Rather, it is one in which Highrise has not established that it would be solvent but for the disputed payroll tax debt. Therefore, on the principle adopted in Caporale and Bayconnection No 1, it is not appropriate to grant any adjournment. Further, the evidence as to the state of the accounting and management of Highrise is such that there is a public interest in not further delaying the winding up of Highrise.
The St George Bank liability and the debt-equity swap are significant both because they indicate that Highrise would not be solvent but for the disputed tax debts and also because they are indicative of the fact that proper books and records sufficient to explain Highrise’s transactions are not being kept and that the transactions which Highrise has entered are unusual, not for identified commercial purposes and not explained as being relevant to the interests of an identified group of companies. I am left with the distinct impression that the true nature and significance of these transactions has not been fully and frankly disclosed to the Court.
More generally, the anomalies in the books and records that have been disclosed by Highrise mean that I cannot be satisfied that they are accurate. In particular, I consider the following matters to be significant:
(a)the undocumented and unexplained $2.4 million debt-equity swap;
(b)the absence of financial statements for any year after 30 June 2011;
(c)the absence of explanation why a non-trading company such as Highrise incurred the St George Bank liability and for whose benefit those funds were paid; and
(d)the substantial volume of funds being paid into and out of the accounts of Highrise for no apparent commercial purpose.
Having regard to the principles as summarised in Southgate, Caporale, Bayconnection No 1, and Bayconnection No 2, these matters indicate to me that it is appropriate, as a matter of discretion, to not adjourn the application for winding up orders pending the completion of the applications for review of the disputed tax debt decisions or, in particular, the pending Appeal Tribunal decision. It is therefore appropriate to refuse the application for an adjournment.
Conclusion
I have decided to refuse the adjournment. As a consequence, in the light of the existence of the tax obligations, Highrise is clearly insolvent. It is therefore appropriate to make the winding up orders sought. The parties wished to be given the opportunity to make written submissions in relation to costs.
Orders
The orders of the Court are therefore:
1. The application in proceedings dated 22 September 2014 is dismissed.
2. Highrise Concrete Contractors (Aust) Pty Ltd (ACN 088 058 084) be wound up in insolvency.
3. Jonathon Colbran and Frank Lo Pilato are appointed as joint and several liquidators of the defendant.
4. Each party is directed to email to my associate written submissions limited to no more than three pages in relation to the costs of the proceedings within 14 days.
| I certify that the preceding eighty-six [86] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Master Mossop. Associate: Date: 6 May 2015 |
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