Deputy Commissioner of Taxation v Petrov

[2008] FMCA 539

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DEPUTY COMMISSIONER OF TAXATION v PETROV [2008] FMCA 539

BANKRUPTCY – Creditor’s petition – grounds of opposition – whether the Deputy Commissioner can rely upon a judgment debt which has been overtaken by an amended assessment of tax considered – the Deputy Commissioner, like any other creditor, is entitled to rely upon an act of bankruptcy and proof of an outstanding debt.

Bankruptcy Act 1966 (Cth), ss.49, 52, 58
Income Tax Assessment Act 1936 (Cth)
Taxation Administration Act 1957 (Cth), ss.250-1, 255-5

Clyne v Deputy Commissioner of Taxation (1982) 45 ALR 323
Commissioner of Taxation v Stokes (1996) 72 FCR 160
Deputy Commissioner of Taxation v Gail Freeman & Co Pty Ltd [2007] FCA 1003
Deputy Commissioner of Taxation v Willis [2007] FMCA 579
Gail Freeman & Co Pty Ltd (in liquidation) v Deputy Commissioner of Taxation [2007] FCA 1381
International Alpaca Management Ltd v Ensor [1999] FCA 72
Re Damien Parkes; Ex Parte Adc Properties Pty Limited (Petitioning Creditor) and Esanda Finance Corporation Limited (Substituted Creditor) [1995] FCA 1712
Re Goldberg; Ex parte Law Society of NSW (1988) 82 ALR 271
Re Mendonca; Ex Parte Federal Commissioner of Taxation (1969) 15 FLR 256
Starbucks Corporation v McLeay [2005] FCA 1269
Taylor v Deputy Commissioner of Taxation (1987) 16 FCR 212; 73 ALR 219

Applicant: DEPUTY COMMISSIONER OF TAXATION

Respondent: ELIO PETROV

File Number: SYG 1946 of 2006

Judgment of: Driver FM

Hearing date: 28 April 2008

Delivered at: Sydney

Delivered on: 30 May 2008

REPRESENTATION

Counsel for the Applicant: Mr J Johnson

Solicitors for the Applicant: Craddock Murray Neumann

Counsel for the Respondent: Mr A Powrie

Solicitors for the Respondent: Powrie & Co

ORDERS

1. A sequestration order be made against the estate of Elio Petrov.

2. The petitioning creditor’s costs, including any reserved costs, be taxed and paid out of the estate in accordance with the Bankruptcy Act 1966 (Cth).

3. The Court notes that the date of the act of bankruptcy is 16 May 2006.

4. All proceedings under order (1) are stayed for a period of 21 days.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 1946 of 2006

DEPUTY COMMISSIONER OF TAXATION

Applicant

And

ELIO PETROV

Respondent

REASONS FOR JUDGMENT

Introduction and background

1. The applicant Deputy Commissioner of Taxation seeks a sequestration order (and other consequential orders) against the estate of the respondent, Elio Petrov.  The Deputy Commissioner relies upon a creditor’s petition filed on 13 July 2006.  The petition is verified by the affidavit of Steven Weiss made on 11 July 2006.  Paragraph 4 of the petition is verified by the affidavit of Khaled Metlej made on 13 July 2006.  The act of bankruptcy relied upon by the Deputy Commissioner is Mr Petrov’s failure to comply with the requirements of the bankruptcy notice served on him on 25 April 2006.  The affidavit of Jordan Bailey made on 27 April 2006 establishes service of bankruptcy notice NN720 of 2006 on Mr Petrov on 25 April 2006.  Service of the creditor’s petition was established by the affidavit of Jordan Bailey made on 4 August 2006.  The Deputy Commissioner further relies on an affidavit of Helen Margaret Randell made on 23 April 2008 to which is exhibited a bundle of documents marked as exhibit HMR1.  A further affidavit of Ms Randell made on 24 April 2008 and filed in court on 28 April 2008 was the final affidavit of debt relied upon by the Deputy Commissioner.  Finally, the Commissioner relies on an affidavit of final search of Khaled Metlej made on 24 April 2008 and filed in court on 28 April 2008.

2. The petition is opposed by Mr Petrov.  He relies on a notice of intention to oppose the petition filed on 11 October 2006.  The grounds of opposition were amended in written submissions filed on 27 July 2007.  Those submissions were themselves amended and Mr Petrov now relies upon written submissions filed on 9 April 2008.  There are three grounds of opposition to the petition.  These are:

   a)there is no proof that the debt or debts upon which the petitioning creditor relies is or are still owing (s.52(1)(c) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”));

   b)the debtor is able to pay his debts (s.52(2)(a) of the Bankruptcy Act); and

   c)for other sufficient cause a sequestration order ought not to be made (s.52(2)(b) of the Bankruptcy Act).

3. Mr Petrov relies upon three affidavits by his solicitor Alan Powrie made on 11 October 2006, 30 June 2007 and 17 March 2008.  I received those affidavits with deletions (for reasons of lack of relevance).

4. The background to this matter is that between 1996 and 2000 the Deputy Commissioner issued a number of income tax assessments in respect of the income tax years ending 30 June 1995 to 30 June 1999.  Following an audit of Mr Petrov’s affairs in 2003 and 2004 and in the light of his failure to lodge income tax returns for the income tax years ending 30 June 2000 to 30 June 2002 the Deputy Commissioner issued between 16 November 2004 and 26 November 2004 amended assessments in respect of the income tax years ending 30 June 1995 to 30 June 1999 and assessments in relation to the years 30 June 2000 to 30 June 2003.  The amended and additional assessments substantially increased Mr Petrov’s taxation liability.  In addition, Mr Petrov became liable for administrative penalties. 

5. In 2005 the Deputy Commissioner commenced recovery proceedings against Mr Petrov in the District Court of New South Wales.  Default judgment was entered against him on 27 January 2006 in the sum of $727, 211.13.  The amount due on the default judgment was not paid and the bankruptcy notice relied upon by the Deputy Commissioner was served on 25 April 2006.  The bankruptcy notice was supported by the default judgment of the District Court.  Mr Petrov did not comply with the bankruptcy notice or challenge it and the present petition was filed on 13 July 2006. 

6. On 11 October 2006 Mr Petrov lodged an objection against the assessments for the years ended 30 June 1995 to 30 June 2003 and an application for the objection to be considered out of time.  The decision ultimately made on that objection resulted in very substantial reductions in Mr Petrov’s income tax liability and administrative penalties.  His liability was reduced to $34,965.59.  The final affidavit of debt of Helen Margaret Randell asserts that that amount remains outstanding (although Mr Petrov asserts that an additional small payment has been made).   On 14 March 2008 Mr Petrov purported to object to the current amended assessments but on 18 April 2008 the Deputy Commissioner decided that the objection is “invalid” because the amended assessments were not adverse to him.  Mr Petrov is considering his rights of review and appeal against that decision (notice of which he asserts he has not yet received) but at the date of the trial of this matter no further administrative or legal proceedings had been instituted to challenge the rejection of the latest objection.

7. The Deputy Commissioner’s written submissions contain a chronology of events which, for convenience, I incorporate:

Date	Event	Source
27/1/2006	Date of judgment in favour of Applicant against the Respondent in the District Court of New South Wales proceedings No: 2076 of 2005	Exhibit to Bankruptcy Notice
22/2/2006	Date of issue of Bankruptcy Notice No NN 720/06
25/4/2006	Date of service of Bankruptcy Notice NN 720/06 upon Respondent	Affidavit of Jordan Bailey sworn 27 April 2006 para 1
27/4/2006	Affidavit of Jordan Bailey sworn as to service of Bankruptcy Notice upon Respondent.
16/5/2006	Date of act of bankruptcy relied upon by the Applicant	Para 4 of Creditor’s Petition
11/7/2006	Affidavit of Steven Weiss verifying paragraphs 1, 2 and 3 and part 4 of the Creditor’s Petition
13/7/2006	Creditor’s Petition presented
13/7/2006	Affidavit of Khaled Metlej sworn verifying paragraph 4 of the Creditor’s Petition
1/8/2006	Creditor’s Petition served on Respondent	Affidavit of  Jordan Bailey para 3
4/8/2006	Affidavit of Jordan Bailey as to service of Creditor’s Petition of supporting documents sworn
30/8/2006	First return date of Creditor’s Petition
16/9/2006	Authority by the Respondent to Alan Powrie to act on his behalf in relation to his affairs	Affidavit of Alan Powrie No 2
26/9/2006	Affidavit of Alan Powrie sworn for the Respondent
10/10/2006	Date of Notice of Intention to Oppose Application or Petition.
11/10/2006	Second Affidavit of Alan Powrie sworn for the Respondent
11/10/2006	Notice of Objections lodged on behalf of the Respondent against the assessments and amended assessments the subject of the District Court proceedings	Affidavit of A Powrie No 2; para 4 annexure “A”
2/7/2007	Affidavit of debt of Doug Carmen.
2/7/2007	Interim Application filed by the Applicant for extension of period of time within which the Creditors Petition will lapse.  Returnable 10:15am 3 July 2007
3/7/2007	Return date for Creditors Petition and Interim Application. On this day the time within which the Creditor’s Petition would otherwise lapse was extended for a period of 24 months from the date of presentation.
12/7/2007	Date upon which the Creditor’s Petition would lapse under section 52 Bankruptcy Act 1966; in the absence of an order extending the time.
12/7/2008	Date upon which Creditor’s Petition will lapse

The issues and submissions

1. The Deputy Commissioner submits that he is entitled to the sequestration and other orders he seeks because an act of bankruptcy has been committed and the Deputy Commissioner is a creditor.  Mr Petrov submits first, that the judgment debt supporting the bankruptcy notice and the creditor’s petition has been overtaken by the amended assessments substantially reducing his liability and that the debt established by those amended assessments is a fresh debt which cannot be the subject of bankruptcy proceedings in the absence of fresh recovery action in accordance with the statutory regime under the Income Tax Assessment Act 1936 (Cth) (“the Income Tax Assessment Act”) and the Taxation Administration Act 1957 (Cth) (“the Taxation Administration Act”).  The Deputy Commissioner responds that the debt relied upon is now the debt established by the final affidavit of debt of Helen Margaret Randell of 24 April 2008 and that that debt was a component of the judgment debt.  The Deputy Commissioner submits that no further recovery proceedings are necessary given that an act of bankruptcy has been committed and he is a creditor. 

2. Mr Petrov secondly submits that a sequestration order should not be made in circumstances where the amended assessments are under challenge.  The Deputy Commissioner responds that there cannot be any real dispute concerning the amended assessments and that, in any event, the purported further objection made by Mr Petrov has been disallowed as invalid.  No further proceedings have been instituted.

3. Finally, Mr Petrov submits that he is able to pay the relatively small debt now relied upon by the Deputy Commissioner.  At the trial of the matter, however, no objective evidence of solvency had been produced.  I permitted Mr Petrov to prove his solvency by paying into court by bank cheque the amount claimed by the Deputy Commissioner within 48 hours.  No payment was made within that time.  At 3.05pm on 29 May 2008 the Court registry in Sydney received a bank cheque for the amount of $34,965.59.

Reasoning

1. There is no doubt that the making of an amended assessment gives rise to a debt recoverable by the Deputy Commissioner in a court of competent jurisdiction[1].  Indeed, the assessments relied upon by the Deputy Commissioner in the District Court proceedings were in part amended assessments and in part original assessments.  There also can be no dispute that a debt arising from an amended assessment is not the same debt (in the sense of being a different amount) as the debt arising from an earlier assessment which has been amended.  However, it does not follow that, if the Deputy Commissioner has successfully sued for the amount of an assessment or amended assessment, that the Deputy Commissioner must commence further recovery action in the case of an amended or a further amended assessment, prior to taking bankruptcy proceedings. 

   [1] s.255-5 of Schedule 1 to the Taxation Administration Act

2. The authorities relied upon by Mr Petrov do not assist him. None of the authorities relied upon by Mr Petrov establishes the primary contention he makes, which is that whenever an assessment is amended, under the statutory regime in the Income Tax Assessment Act and the Taxation Administration Act, fresh recovery proceedings must be instituted before payment can be enforced through bankruptcy (or other) proceedings. Mr Petrov sought to draw support from the decision of the Full Federal Court in Commissioner of Taxation v Stokes (1996) 72 FCR 160. That was not a case about original and amended assessments. It was a case about competing and conflicting assessments.

3. Mr Petrov also sought to draw support from a decision of this Court in Deputy Commissioner of Taxation v Willis [2007] FMCA 579 at [17] where Wilson FM said:

   Section 250-1 of the Schedule to the Taxation Administration Act 1953 provides that Part 4-5 of the Schedule deals with the methods by which the Commissioner may collect and recover amounts of taxes and other liabilities. Proving in bankruptcy is not one of the methods provided for. Section 255-5(2) permits the Commissioner or a Deputy Commissioner to sue in a court of competent jurisdiction to recover an amount of a tax related liability that remains unpaid after it has become due and payable. In this case, that occurred when the applicant sued in the District Court and obtained judgment. There is nothing in Part 4-5 of the Schedule which provides that applying for a sequestration order against a person who owes a tax related liability is a proceeding to recover the amount of that liability. Neither does it accord with the concept of bankruptcy that it is a proceeding to recover a debt. Rather it is a process by which the assets of the bankrupt are collected and distributed amongst his or her creditors. A result of that process may be the payment of a dividend to a creditor that satisfies the debt in whole or in part. However, in my view, applying for a sequestration order so as to initiate the administration of the debtor’s estate in bankruptcy is not a proceeding to recover an amount of a tax related liability.

4. I do not understand his Honour’s observations in that case as suggesting that the Deputy Commissioner of Taxation is in an inferior position to any other creditor in relation to bankruptcy. Once a sequestration order has been made, the property of the bankrupt vests in his or her trustee and recovery proceedings against the bankrupt are stayed, subject to leave of the Court[2]. It would be absurd to suggest that the Deputy Commissioner of Taxation could not prove in a bankruptcy simply because proving in bankruptcy was not a collection method prescribed in the Taxation Administration Act, especially in circumstances where the recovery procedure contemplated in that Act was unavailable because of the operation of s.58(3) of the Bankruptcy Act.

   [2] s58(3). of the Bankruptcy Act

5. Once an act of bankruptcy has been committed, any proven creditor may prima facie have the benefit of a sequestration order.  A judgment is not required to prove the debt[3]. This is so even where a petitioning creditor does not proceed with a petition. Section 49 of the Bankruptcy Act contemplates that another creditor may be substituted for the petitioning creditor and I see no reason in principle to exclude the Deputy Commissioner of Taxation from the benefit of that provision, whether or not the Deputy Commissioner has the benefit of a judgment debt. In my view, the existence of an unsatisfied taxation assessment would be sufficient to establish the Commissioner as a creditor for the purposes of s.49 of the Bankruptcy Act[4] provided that the debt preceded the act of bankruptcy[5].  That appears to have been the course taken in Starbucks Corporation v McLeay [2005] FCA 1269, although the petition in that case was ultimately dismissed on the ground of solvency.

   [3] Re Goldberg; Ex parte Law Society of NSW (1988) 82 ALR 271

   [4] Re Damien Parkes; Ex Parte Adc Properties Pty Limited (Petitioning Creditor) and Esanda Finance Corporation Limited (Substituted Creditor) [1995] FCA 1712 at [10]

   [5] Taylor v Deputy Commissioner of  Taxation (1987) 16 FCR 212; 73 ALR 219

6. There has been no appeal against the decision of the District Court and no application to stay that decision. There was no challenge to the bankruptcy notice that was issued in consequence of the unsatisfied judgment of the District Court. The debt now relied upon by the Deputy Commissioner is a small remaining part of the judgment debt. The affidavit of Ms Randell made on 23 April 2008 and exhibit HMR1 establishes that the Deputy Commissioner is pursuing the full amount originally claimed in respect of the year of income ended 30 June 2003 and part of the amount originally claimed in respect of the years ended 30 June 2000 to 30 June 2002. The original assessments in respect of those years of income formed part of the amount awarded by the District Court. The parties would be in the same position as they currently are if Mr Petrov had paid the difference between the judgment debt and the amount now due or if they had reached a negotiated outcome to that effect. All that has happened is that, through the making of the amended and further amended assessments now relied upon, the Deputy Commissioner has abandoned the greater part of the judgment debt. He is not thereby deprived of the remaining proportion of the judgment debt still relevant and the act of bankruptcy relied upon.

7. I further note that the argument advanced on behalf of Mr Petrov in these proceedings was rejected in the Corporations Law context by the Federal Court in Deputy Commissioner of Taxation v Gail Freeman & Co Pty Ltd [2007] FCA 1003, followed in Gail Freeman & Co Pty Ltd (in liquidation) v Deputy Commissioner of Taxation [2007] FCA 1381 at [3].

8. I do not rule out the possibility that a creditor’s petition based upon an act of bankruptcy in relation to a judgment debt for unpaid tax might be an abuse of process where the assessment ultimately relied upon by the Deputy Commissioner had no connection to the judgment debt.  That might be the case, for example, where the judgment debt had been paid following the commission of an act of bankruptcy and the Commissioner issued further assessments in respect of years of income that had not been the subject of any recovery proceedings[6].  However, that is certainly not the case here.  The debt established by the affidavit of debt is, as I have already noted, a component (albeit a small one) of the judgment debt which supported the bankruptcy notice, the non‑compliance with which resulted in the act of bankruptcy.  I reject the first ground of opposition to the creditor’s petition.

   [6] cf Re Mendonca; Ex Parte Federal Commissioner of Taxation (1969) 15 FLR 256

9. I also reject the second ground.  I accept from the letter to Mr Petrov dated 18 April 2008 that the Deputy Commissioner has dealt with the purported objection to the amended assessments.  His decision that the objection is invalid appears to be substantially correct, although it may not be correct in relation to the 2003 year of income where the first objection was disallowed in full.  Mr Petrov has rights of review and appeal against the decision on his latest objection and has expressed an intention to exercise those rights but he has not yet done so.  The availability of such a right in respect of a year of income where the assessment is the subject of a judgment debt that has not itself been challenged is not in my view a reason for the Court not to make a sequestration order[7].

   [7] Clyne v Deputy Commissioner of Taxation (1982) 45 ALR 323 at 329

1. I also reject the third ground. As at the date of the trial of this matter, the only evidence of Mr Petrov’s solvency was his own unsupported assertion. No payment into court was made within the time specified by my order, despite his solicitor being instructed at the trial that Mr Petrov intended to pay into court the amount he conceded remained due and payable. The payment into court of the amount due, one month later, and the day before judgment was to be delivered, is suggestive of extreme difficulty on the part of Mr Petrov in obtaining funds to make that payment if indeed the payment was made by Mr Petrov from his own funds (of which there is no evidence) rather than from the money of someone else[8]. Mr Petrov has not demonstrated a capacity to pay his debts when they fall due, or within a reasonable time.

   [8] International Alpaca Management Ltd v Ensor [1999] FCA 72 at pp 4, 9

2. I am satisfied that Mr Petrov committed the act of bankruptcy alleged in the petition. I am satisfied with the proof of the other matters of which s.52(1) of the Bankruptcy Act requires proof. I will make the orders called for on the petition. However, pursuant to s.52(3) of the Bankruptcy Act, I will stay proceedings under the sequestration order for a period of 21 days, so that the parties can consider their respective positions further.

I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate: 

Date:  30 May 2008