Deputy Commissioner of Taxation v Criniti
[2009] FMCA 417
•23 April 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DEPUTY COMMISSIONER OF TAXATION v CRINITI | [2009] FMCA 417 |
| BANKRUPTCY – Insolvency administered under small debtor debt agreement – compliance with requirements of Part IX – debtor failed to declare taxation debts in statement of affairs – debt agreement declared void because debts exceeded maximum threshold – debtor insolvent – sequestration order made. |
| Bankruptcy Act 1966 (Cth), ss.40(1), 185C, 185D, 185T, 185U Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.4.06 Income Tax Assessment Act 1936 (Cth) Social Security Act 1991 (Cth) Taxation Administration Act 1953 (Cth) |
| Constantinidis v FCT (2004) 55 ATR 348 DCT v Trigo-Contillo [2005] FMCA 1856 |
| Applicant: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent: | FRANK CRINITI |
| File Number: | SYG 365 of 2009 |
| Judgment of: | Smith FM |
| Hearing date: | 23 April 2009 |
| Delivered at: | Sydney |
| Delivered on: | 23 April 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr R Quinn |
| Solicitors for the Applicant: | ATO Legal Services |
| Counsel for the Respondent: | In Person |
THE COURT DECLARES THAT:
The debt agreement administration number WA 2235/7/3 (“the debt agreement”) lodged by the respondent on 29 June 2007 under Pt.IX of the Bankruptcy Act 1966 (“the Act”) is void in its entirety pursuant to s.185U(2) of the Act.
ORDERS
A sequestration order be made against the estate of FRANK CRINITI, also known as FRANCESCO CRINITI pursuant to s.185U(4) of the Act..
The applicant creditor’s costs, including all reserved costs, be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
Note that the date of the act of bankruptcy under s.40(1)(ha) of the Act is 29 June 2007.
The applicant must within 2 days give a copy of this order to the Official Receiver in Sydney.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 365 of 2009
| DEPUTY COMMISSIONER OF TAXATION |
Applicant
And
| FRANK CRINITI |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
This is an application by the Deputy Commissioner of Taxation for relief under s.185U of the Bankruptcy Act 1966 (Cth). He asks the Court to declare void a debt agreement, which was proposed by Mr Criniti and accepted by the Official Receiver under Part IX of the Bankruptcy Act. The Deputy Commissioner seeks a further order for a sequestration order under s.185U(4), consequential upon the setting aside of the debt agreement.
Mr Criniti's proposal for a debt agreement was lodged with the Official Receiver on 29 June 2007. That date, in my opinion, constitutes the date when he “gave” his proposal to the Official Receiver for the purposes of s.185C of the Act, and also constitutes “the proposal time” for the purposes of s.185C(4). It also constitutes the date of an act of bankruptcy for the purposes of s.40(1)(ha) of the Act.
In his debt agreement proposal, Mr Criniti included a statement of affairs as is required under s.185D to accompany a debt proposal. It identified six unsecured creditors, the most significant of whose debts was $8908 owing to Transpacific. The six unsecured creditors were identified as being owed a total of $32,138. The Deputy Commissioner was not included as an unsecured creditor. This was notwithstanding that there had been exchanges between Mr Criniti's tax advisers and the Deputy Commissioner's officers concerning substantial tax liabilities for the 2000 and subsequent tax years. Outstanding amended tax assessments had issued for a total sum substantially exceeding the amount of unsecured creditors disclosed in the statement of affairs accompanying the debt agreement proposal.
On the evidence before me there was outstanding to the Deputy Commissioner, in relation to those notices of amended assessment of income tax, and including additional amounts of administrative penalty and general interest, the sum of $97,491.08 at the date of lodgement of debt agreement proposal.
Under s.185C(4)(b):
A debtor cannot give the Official Receiver a debt agreement proposal at a particular time (the proposal time) if:-
…
(b)at the proposal time the debtor's unsecured debts total more than:
(i) the threshold amount; or
(ii)if the regulations prescribe a greater amount for this purpose-the amount prescribed;…"
The regulations did not prescribe an amount for the purposes of sub‑paragraph (ii), and the “threshold amount” is defined in s.185C(5) as:
threshold amount, in relation to a particular time, means 7 times the amount that, at that time, is specified in column 3, item 2, Table B, point 1064‑B1, Pension Rate Calculator A, in the Social Security Act 1991.
This makes reference to the maximum married rate of a social security pension at the relevant time. The adoption of that threshold might be sensible policy in relation to the purposes of Part IX insolvency procedures, which were identified by Reithmuller FM in DCT v Trigo-Contillo [2005] FMCA 1856. It may also be a convenient method of drafting a reference to that threshold amount. However, it takes the reader of the bankruptcy legislation into the morass which is the Schedules to the Social Security Act1991 (Cth). Once the relevant module is located in the Schedules, an annual rate for the partnered pension can be located, but this has to be adjusted for CPI increases. Moreover, it appears that different tables of adjusted CPI rates for the married rate of pension appear on the web sites of ITSA and of the department responsible for the social security legislation. A hyperlink in the ComLaw electronic version of the Social Security Act takes the reader to the latter, and I am inclined to treat it as more authoritative.
According to the table set out on the internet site for the Department of Family and Community Services, the annual married rate of pension applicable at the proposal time of Mr Criniti's debt agreement was the rate adjusted from 20 March 2007. This was the amount of $11,401, and when multiplied by 7 the threshold amount at that time was, therefore, $79,807.
Plainly, the tax debts arising under the amended assessment notices which were outstanding at that date significantly exceeded that threshold amount, even before the amount of the debts of the other six creditors was taken into account. If I accept that the Deputy Commissioner was owed the amount asserted in the amended tax assessments at the proposal time, then clearly, the debt agreement proposal was not made “in accordance with” Part IX of the Act and did not “comply with” that Part. If these debts were owing, then the Deputy Commissioner has a ground for applying for an order declaring the debt agreement void under s.185T(2)(a) of the Bankruptcy Act.
That section provides two grounds for applying for such an order:
Grounds for applying for an order
(2)A person mentioned in subsection (1) may apply for an order only if:
(a)there is doubt on a specific ground that all or part of the debt agreement was not made in accordance with this Part or does not comply with this Part; or
(b)the statement of affairs lodged with the debt agreement was deficient because it omitted a material particular or because it was incorrect in a material particular.
The absence of reference to the debts owing to the Deputy Commissioner in Mr Criniti's statement of affairs might also appear to give rise to a ground for applying to have the debt agreement void under 185T(2)(b), and the Deputy Commissioner's present application invokes both of these grounds.
Mr Criniti has filed a notice of opposition to the Deputy Commissioner's application, which states as follows:
1.Objected to the tax reversal on the 14th September 2005 and been to date.
2.Group Certificate was supplied.
3.I was to believe it was paid and correct.
His affidavit refers to his employing a firm of solicitors and tax agents to act on his behalf in 2005, in relation to a dispute as to his liabilities for income tax for the 2000 year. He attaches a letter from them which objected to the disallowance of a claim to tax instalment credits of $39,526.25 for the year ending 30 June 2000, although I note that there is no right to make a formal ‘objection’ to the refusal to make such a credit (see Constantinidis v FCT (2004) 55 ATR 348 at [72]). Mr Criniti's tax agents submitted that he should be allowed that amount of credit. They refer to a group certificate which apparently had been forwarded by former tax agents for Mr Criniti subsequent to the lodgement by them of an electronic income tax return, seeking to establish that Mr Criniti's employer had made withholdings of PAYG tax out of his remuneration for that year. However, that purported certificate is flawed in many significant respects. It is undated, the signature is obscure, and the stated employer company was in fact deregistered prior to that year of income. It therefore provided far from adequate proof of withholdings by an employer, as required under the PAYG provisions of the Taxation Administration Act1953 (Cth).
The letter from Mr Criniti's solicitor recognised some of these deficiencies, but said they were “beyond our client's control”. They made the contentions that he never knew who his actual employer was beyond a business name “Sumo Fresh” used by his brother, that he always assumed that he was being paid a net income after the withholding of tax instalments, and that he had no control over who was doing this or how it was being done. The solicitor submitted:
Any failure to pay was and is the responsibility of the employer and it is obviously the employer, not our client to whom the ATO should look for payment.
Mr Criniti relies on the same arguments in his evidence and contentions today. He did not expressly address liabilities for income tax arising in the years subsequent to 2000. It appears that a tax audit, performed during 2005 and 2006, identified a similar lack of withholdings being made by an employer and being forwarded to the tax office from Mr Criniti's remuneration in relation to later years. However, Mr Criniti urges upon me that any failure to make withholdings and forward them in those years was similarly a matter out of his knowledge and control.
Mr Critini was unable to present any evidence, either to the tax auditors or to the Court, establishing that in fact any PAYG tax was withheld from his remuneration over the relevant years. Indeed, the evidence referred to in a tax auditor's report tends to suggest clearly that no such withholdings were ever made by the employer, that Mr Critini was paid with unrecorded cash payments, and that, at best, the employing business was conducted in the hope that eventually it might have enough money to forward its employees' PAYG payments later. If so, Mr Criniti was never entitled to a tax credit for withheld payments pursuant to Sch.1 s.18-15 of the Taxation Administration Act, and the present claim by the Income Tax Commissioner for unpaid income tax as reflected in the amended notices of assessment correctly declined to recognise any tax credit for withheld PAYG amounts.
On the evidence before me, I am satisfied that the Deputy Commissioner was at the time of the debt proposal a creditor in the assessed amount of $97,491.08, and that this was a tax related liability that was due and payable to the Deputy Commissioner at that time pursuant to s.255-5 of the Taxation Administration Act. In this respect, the notices of assessment provide conclusive evidence, pursuant to s.177 of the Income Tax Assessment Act 1936 (Cth). I accept the submissions of the Deputy Commissioner that there was no right for Mr Criniti to set off against that liability any PAYG credits.
I therefore do not accept the basis of the objection to the present application which was presented by Mr Criniti in his notice of opposition, and in the evidence he has presented in support of it both in writing and orally today. I am satisfied for the above reasons that the Deputy Commissioner has made out an entitlement to an order declaring the debt agreement void on the ground identified in s.185T(2)(a) of the Bankruptcy Act.
The Court's powers in relation to such a declaration are identified in s.185U:
185U Making an order declaring a debt agreement void
Power to make order
(1)On an application under section 185T, the Court may make an order declaring a debt agreement void.
Limit on declaring debt agreement void on grounds of non‑compliance with this Part
(2)The Court must not declare all or part of a debt agreement void on the ground that it does not comply with this Part if the agreement or part of the agreement complies substantially with this Part.
Declaring a debt agreement void on grounds of deficient statement of affairs
(3)The Court must not declare all or part of a debt agreement void on the ground that the statement of affairs lodged with the debt agreement was deficient, unless the Court is satisfied that it is in the creditors’ interests to declare the agreement or part of the agreement void.
Sequestration order
(4)If the Court makes an order declaring all of a debt agreement void, the Court may also make a sequestration order if a creditor applied for the sequestration order.
Ancillary orders
(5)If the Court makes an order declaring all or part of a debt agreement void, the Court may make such other orders as the Court thinks fit.
(6)An order under subsection (5) may be an order directing a person to pay another person compensation of such amount as is specified in the order. This subsection does not limit subsection (5).
I am satisfied in terms of s.185U(2) that the departure from the threshold maximum indebtedness required by s.183C(4)(b) was of such a dimension that it is impossible to characterise the debt agreement as complying in whole or part ‘substantially’ with Part IX. Once I am so satisfied, the section raises no other condition for the making of a declaration, although there may be a discretionary element in 185U(1). However, in the present case, I can see no reason for declining to make an order declaring the debt agreement void due to its non-compliance with s.185C(4)(b). There is a clear policy reflected in the Act that insolvent debtors whose debts exceed the threshold maximum should not have their insolvency administered under Part IX.
My conclusion that a declaration should be made under s.185U(2) means that I do not need to address the alternative basis for which a declaration voiding the debt agreement was sought, being the omission of material particulars from the statement of affairs. I note that under 185U(3) a declaration on that ground may not be made unless the Court is satisfied that this is in the interests of creditors. No such consideration is required where a declaration is made under s.185U(2).
Had I been required to consider this issue, I would have followed the reasoning of Riethmuller FM in DCT v Trigo-Contillo in thinking that the interests of the creditors would be served by declaring the debt agreement void. The present case is clearer, since taking into account the relative amounts of the debts outstanding at the time of the proposal, Mr Critini’s total indebtedness was dominated by the present debt of the Deputy Commissioner, and it is plainly contrary to the interests of the creditors considered globally that the Deputy Commissioner be excluded from participation in his insolvency.
The Court has power to make a sequestration order under 185U(4), consequential upon the making of a declaration under that section. Although the power is framed in permissive terms by the reference to “may also make a sequestration order”, the implication appears to be that the Act expects a sequestration order normally to be made, so that the debtor’s insolvency can be administered under Part VI based upon an act of bankruptcy arising under s.40(1)(ha) when “the debtor gives the Official Receiver a debt agreement proposal”.
Although a sequestration order under s.185U(4) is given the same effect as an order under s.52, s.185T(5) suggests that the Court is not required to be satisfied as to most of the provisions of the Act concerning the making of a sequestration order upon the petition of a creditor. It provides:
185TApplying for an order declaring a debt agreement void
…..
(5)For the purposes of this Act, making an application for a sequestration order under subsection (4) is taken to be presenting a creditor’s petition against the debtor, but subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to the application.
This leaves some obscurity as to the extent to which a creditor who has obtained the voiding of a debt agreement needs to establish the currency of his debt, the insolvency of the debtor, or any other matter which might normally need to be considered by the Court. It also leaves unclear the extent of compliance required with the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.4.06.
Out of abundant caution, the Deputy Commissioner has presented evidence showing that, as at today, there is still outstanding tax debts by Mr Criniti now in the sum of $116,918.02, and has also filed an affidavit of search showing that Mr Criniti is not subject to any bankruptcy proceeding other than that arising from his debt agreement which I shall be declaring void.
Considering all the circumstances of the present case, I accept that it is appropriate upon the making of the declaration voiding the debt agreement that a sequestration order should be made. Mr Criniti admitted in his evidence that he was unable to pay the Deputy Commissioner's debt and his other debts at present. He admitted that he had no assets from which payment could be made in the immediate or reasonably foreseeable future. His debt agreement, which will now be brought to an end, proposed that such of his creditors as were recognised in his statement of affairs would be paid at the rate of $116 per week over five years. This proposal is far from evidence of solvency, and indeed points to clear insolvency today and the appropriateness of making a sequestration order.
I am therefore satisfied that it would be in the interests of all creditors and consistent with the policies of the Bankruptcy Act upon the voiding of the debt proposal, that Mr Criniti's estate be administered in bankruptcy for the benefit of all his creditors.
In opposition to the making of a sequestration order, Mr Criniti referred to the considerations which had been urged upon the Tax Commissioner’s officers when inviting them to give the PAYG credits which had been claimed in his tax returns. That is, that he was innocent of fault in relation to the failure of his employer to withhold and make PAYG instalments, and that the persons responsible were unspecified employers and tax advisers. He urged upon me the consideration that there was a greater stigma attaching to having his affairs administered in insolvency through bankruptcy rather than under a debt agreement. I appreciate the considerations to which he refers. However, given the size of the debt which I now find is owed to creditors, he may indeed be better off by having his insolvency administered under the Bankruptcy Act through a normal sequestration process.
On balance of all the considerations which were urged by both parties before me today, I consider that it is appropriate to make a sequestration order under s.185U(4). As I have indicated, that will have the effect that an act of bankruptcy will be recognised under s.40(1)(ha) from the date when Mr Criniti presented his debt agreement proposal. As I have found, that was 29 June 2007. This finding might not preclude the recognition of any earlier act of bankruptcy which becomes apparent to his trustee.
I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Michael Abood
Date: 6 May 2009
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