Peldan v D.C.T.
[2005] FMCA 547
•28 April 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PELDAN & ANOR v D.C.T. | [2005] FMCA 547 |
| BANKRUPTCY – Application seeking declaration pursuant to section 120 of the Bankruptcy Act 1966 – consideration of the term ‘tax’ for the purposes of section 120 – whether it should exclude penalties and could include ‘tax’ payable by someone other than the Bankrupt – whether in construing ‘tax’ for the purposes of section 120(2)(a) a similar statutory construction applied in the context of section 122(3)(b). |
Income Tax Assessment Act 1936
DFCT v Woodhams (2000) 199 CLR 370
Mathews v Chicory Marketing Board (Vict) (1938) 60 CLR 263
MacComick v FCT (1983-84) 158 CLR 622
Air Caledonie International v The Commonwealth (1988) 165 CLR 462
Woodhams v DFC 87 ATC 5119
Victorian Producers’ Co-op Co Ltd v Kenneth (1999) 1 ABC (NS) 198
Sutherland v Brien (1999) NSWSC 155
Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234
Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217
Zohar v Hicks (2002) FMCA 308
| Applicants: | MICHAEL PELDAN & MORGAN LANE (TRUSTEES OF THE BANKRUPT ESTATE OF THOMAS MELLERS) |
| Respondent: | DEPUTY COMMISIONER OF TAXATION |
| File No: | BRG 293 of 2004 |
| Delivered on: | 28 April 2005 |
| Delivered at: | Brisbane |
| Hearing date: | 15 March 2005 |
| Judgment of: | Baumann FM |
REPRESENTATION
| Counsel for the Applicant: | Mr Couper QC with Ms Hindman |
| Solicitors for the Applicant: | Quinn & Scattini |
| Counsel for the Respondent: | Mr Hacks SC with Mr Byrne |
| Solicitors for the Respondent: | Australian Government Solicitor |
ORDERS
A declaration be made that the transfer of property constituted by a payment of $181,476.10 on 7 June 2002 is void against the Applicant Trustee.
The Respondent shall pay to the Applicants the sum of $181,476.10.
The parties shall file and exchange any written submissions as to costs within 21 days.
That the parties be at liberty to apply in respect of interest.
Otherwise the Application is dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 293 of 2004
| MICHAEL PELDAN & MORGAN LANE (TRUSTEES OF THE BANKRUPT ESTATE OF THOMAS MELLERS) |
Applicant
And
| DEPUTY COMMISSIONER OF TAXATION |
Respondent
REASONS FOR JUDGMENT
Introduction
On 2 June 2003, Thomas Mellers (“the bankrupt”) filed a Debtors petition and the Applicants were appointed trustees of his estate.
On 9 June 2004, the Applicants filed an Application in this Court seeking the following declaration, namely:-
“that the payment of the sum of $408,208.64 by Thomas Mellers to the Respondent on 7 June 2002 was an undervalued transaction pursuant to section 120 of the Bankruptcy Act 1966 (Cth) and void against the Applicants.”
The Respondent, Deputy Commissioner of Taxation opposes the Application.
Background facts
It is agreed that between 1 September 2000 and 28 February 2002, KLAT Pty Ltd (a company of which the Bankrupt was a Director at all material times), incurred taxation debts to the Australian Taxation Office (“ATO”) in excess of $450,000.
The Respondent issued between 10 May 2001 and 24 April 2002, Director Penalty Notices (“DPN”) pursuant to s.222AOA of the Income Tax Assessment Act 1936 (“ITAA”) to Thomas Mellers seeking payment of $285,076.
On 7 June 2002, Thomas Mellers sent to the ATO two Suncorp Metway cheques payable to him, but endorsed by him in favour of the ATO. These two cheques amounted in total to $424,507.90.
It was agreed before me that of this combined payment, the sum of $243,031.80 extinguished the liability of Thomas Mellers under the DPN. The balance of $181,476.10 was applied to payment of further tax liabilities owed by KLAT Pty Ltd.
Statutory Framework
Section 120 of the Bankruptcy Act 1966 (“the Bankruptcy Act”) provides relevantly that:-
“Undervalued Transfers
Transfers that are void against trustee
(1) A transfer of property by a person who later becomes a bankrupt (the transferor ) to another person (the transferee ) is void against the trustee in the transferor's bankruptcy if:
(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
Exemptions
(2) Subsection (1) does not apply to:
(a) a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b) a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d) a transfer of property if the transfer is of a kind described in the regulations. “
The Director Penalty Notices are issued pursuant to s.222AOC of the ITAA, which provides as follows:-
“Penalty for directors in office on or before due date
(1) If section 222AOB is not complied with on or before the due date, each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company's liability under a remittance provision in respect of deductions or amounts withheld:
(a) that the company has deducted for the purposes of Division 1AAA, 3B or 4 of this Act, or withheld for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (as the case requires); and
(b) whose due date is the same as the due date.
(1A)If section 222AOBAA is not complied with before the end of the payment day, each person who is a director of the company on the payment day is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount or amounts that the company is required to pay under section 13- 5 in Schedule 1 to the Taxation Administration Act1953 in respect of the payment or payments relating to the payment day.
(2)If section 222AOBA is not complied with before the end of the benefit day, each person who is a director of the company on the benefit day is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount or amounts that the company is required to pay under Subdivision 16-B in Schedule 1 to the Taxation Administration Act1953 in respect of the benefit or benefits provided on the benefit day.”
Submissions
I had the benefit of concise and well considered written and oral submissions presented by Mr Couper QC for the Applicants and Mr Hack SC for the Respondent.
Arising from those submissions I have taken the view that I should deal with the arguments advanced separately in respect of the two different types of payments for reasons which I explain.
It is not in dispute that:-
(a)the assignment of the cheques constituted a payment of money by the Bankrupt, which for the purposes of the section amounted to a “transfer of property” (section 120(7)(d)); and
(b)the transfer took place in the period beginning 5 years before the commencement of the bankruptcy.
Payments under DPN’s
An examination of the legislative scheme of which s 222AOC forms part was helpfully undertaken by the High Court in DFCT v Woodhams (2000) 199 CLR 370. Employees have liability to remit amounts deducted from the salary and wages for the tax liabilities of their employees. The High Court said:-
“As was pointed out by Phillips JA in Woodhams v DCT, this is not a liability to pay tax. It concerns a responsibility to collect tax, and an obligation to remit the amounts collected. Division 9 seeks to protect the revenue by the imposition of penalties upon directors of non-remitting corporate employers.”
The notices must be issued before any action may be taken to recover the penalty as a debt from the Directors. The Directors have options before recovery against them personally, including ensuring the company is placed under administration or wound up within 14 days.
A penalty recovered under Division 9 is applied towards meeting the company’s obligations under the relevant Division.
Payment of $243,031.80
The first question that arises is whether the Bankrupt’s payment of $243,031.80 as a result of the DPN, is a “payment of tax payable under a law of the Commonwealth” so as to attract the exemption afforded by s.120(2)(a) of the Act.
The Applicant contends that:-
a)The term ‘tax’, not being defined for the purpose of s.120, should be interpreted as excluding penalties and could not include ‘tax’ payable for someone other than the Bankrupt.
b)The payment made by the Bankrupt was a penalty, and it is wrong to characterise the payment by him, which extinguished that obligation, as a payment of tax.
c)If tax is to be construed in this way in s.120(2)(a) of the Act, it would also be construed in this way in s.122(3)(b) of the Act. In that case, the effect would be that a person about to become bankrupt could convert otherwise voidable preferences under s.122 into payments made for consideration equal to the value of the payment and in the ordinary course of business merely by paying the tax liability of a creditor. This was described as “nonsensical”.
d)The evident purpose of s.120(2)(a) is to avoid the consequence that any payment of tax within the prescribed periods in s.120 would always be a void transfer of property because there was no consideration for it.
The respondent submits on this issue that:-
a)The word ‘tax’ in s.120 ought be read as encompassing payments of revenue as distinct from, for example, payments of services rendered.
b)Reference to a “tax payable under a law of the Commonwealth or of a State or Territory” suggests it was the legislative intention to extend the meaning to other forms of revenue raising imposed by the States (e.g. Stamp Duty).
c)A tax is traditionally understood as “a compulsory extraction of money by a public authority for public purposes, enforceable by law, and … not a payment for services rendered” (see Mathews v Chicory Marketing Board (Vict) (1938) 60 CLR 263 at 276. In response the Applicants referred me to the general proposition established by decisions of the High Court that a penalty is not a tax (see MacComick v FCT (1983-84) 158 CLR 622 to 639; Air Caledonie International v The Commonwealth (1988) 165 CLR 462 at 467) and as earlier referred to in Woodhams.
Neither Counsel was able to offer any submission founded on the Explanatory Memorandum which would have accompanied the presentation of s.208 of Schedule 1 of the Bankruptcy Legislation Amendment Act 1996. The heading to the section makes it clear that the section is concerned with “Undervalued Transactions” and a clear intention of the Bankruptcy Legislation Amendment Bill 1996 was a direct challenge to undervalued transactions and to add to the range of antecedent transactions which can be challenged by the Trustee in Bankruptcy.
When Phillips JA in Woodhams v DFC 87 ATC 5119 concluded that:-
“s 222AOC imposes a penalty on the directors, it does not impose a tax”
he did so within the context of an inquiry as to whether s.222AOC imposed a tax and was therefore contrary to section 55 of the Constitution. He was not concerned with the interpretation of section 120(2) of the Bankruptcy Act 1966.
It is a mystery why ‘tax’ is more specifically and broadly defined at s.122(7) of the Act (for the purpose of s.122) but is not otherwise defined in section 120 of the Act.
Because s.120(2) extends to taxes payable under a law of a State or Territory, I have formed the view that the word ‘tax’ should be read more widely than a tax for the purpose of s.55 of the Constitution.
In this case what the Bankrupt paid was a statutory demand upon him personally which, although not a tax upon him personally was in effect a penalty imposed in respect of the ancillary obligation directed to collecting the tax payable by the employees of KLAT Pty Ltd.
The payment made in effect converted to payment of tax in the hands of the recipient Respondent and would have been credited to the employees liability.
Does this make the payment of $243,031.80 a “payment of tax payable under the law of the Commonwealth”. I have formed the view that it does because:-
(a)I find the effect of the payment, although a penalty, was to pay the tax for and on behalf of the employees;
(b)It was an intention of the Parliament to protect the revenue by inserting s.120(2);
(c)The amount became payable by the Bankrupt upon issue of the DPN – he was under a compulsion to do so (“under the law of the Commonwealth”), and it could not be construed as an entirely voluntary transfer of property.
It follows that I find, so far as the payment of $243,031.80 is concerned, that it is not a transfer that is void against the Trustee.
Payment of $181,476.10
In respect of this payment, it follows from my analysis that I am of the view that this payment does not fall within the exemption afforded by s.120(2)(a) of the Act, because, although it was a payment of a tax, it was not ‘payable’ by the Bankrupt. It was a voluntary payment made by the Bankrupt of an unsecured debt owed by KLAT Pty Ltd to the Respondent.
I construe s.120(2) as meaning a “payment of tax payable” by the Bankrupt “under a law of the Commonwealth”. I do not agree with the submission of Mr Hack SC, that the words “payable under a law of the Commonwealth” simply describes the source of the obligation not whose obligation it is.
If that was not its meaning, then any person could give priority to payments of other persons’ or entities’ tax, when not compelled by a law of the Commonwealth, and effectively reduce the available estate to their own creditors upon sequestration. Since s.221P(2) of the ITAA was repealed effective in June 1993, the Commissioner of Taxation lost the priority for taxation, over other debts. To give the meaning to s.120(2) contended by the Respondent would be to reinstate priority for any tax paid by anyone who became Bankrupt on behalf of another person, as is the case here with the payment of $181,476.10.
Accordingly, I find this payment does not attract the exemption provided by s.120(2) of the Act.
Did the Respondent give consideration for the payment or consideration of less value than the market value
In Victorian Producers’ Co-op Co Ltd v Kenneth (1999) 1 ABC (NS) 198, his Honour Merkel J agreed with the observations made by Austin J in Sutherland v Brien (1999) NSWSC 155 as to s 120 in its current form, namely that:-
·“Property is broadly defined in s 5 of the Act and includes personal property such as a chose in action.
·Section 120(1)(b) requires the Court to identify the consideration actually given by the Transferee rather than the consideration which might have been given but was not in fact given.
·The value of the property transferred is to be its “market value” at the time of the transfer which is to be compared with the “value” – not necessarily the market value – of the consideration given by the transferee.
·The consideration given by the transferee is to be assessed on an objective basis not dependent on any special value which the transferor may have subjectively placed on the consideration.”
I accept as accurate the principles of law contended by the Applicant that:-
a)“Consideration” in the section is used in its ordinary common law legal sense (Official Trustee in Bankruptcy v Lopatinsky (2003) 129 FCR 234 at 249) and that past consideration is not consideration for this purpose (Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217 at 236 - 250).
b)The plain words of the section make it clear that consideration must move from the transferee.
c)Where the consideration for a transfer of property is said to be forbearance to sue, then the value of an agreement to forbear is closely linked to the value of the chose in action represented by the debt. In particular, the likelihood of the debtor being able to repay the indebtedness is relevant to determining whether the chose in action has any value and whether therefore the forbearance to sue has any value (see Victorian Producers Co Op at 202-203; Zohar v Hicks (2002) FMCA 308 at [39]-[57]).
The Respondent says that:
“… it is plain from the material that the payment made on 7 June 2002 was the product of an agreement involving the Respondent for the one part and Mr and Mrs Mellers and KLAT (and Mr Maule, the accountant) for the other part. In its essential terms it was an agreement whereby, in consideration of the Respondent agreeing to adjourn, and later dismiss, the winding-up application, Mr Mellers would pay $450,000 to satisfy the tax liabilities of KLAT…”
I agree with the contention of the Applicant that at all material times KLAT Pty Ltd was insolvent because, as set out at paragraph 24 of Submissions:-
“(a)KLAT Pty Ltd began to accrue tax debts as early as
1 September 2000 (Statement of Agreed Facts para 3);
(b)An earlier Application to wind up KLAT Pty Ltd was made by the Respondent on 5 March 2002 based on non-compliance with a statutory demand (para 12, affidavit of Mr Peldan filed 12 November 2004). That statutory demand was on account of liabilities with some dating back to 14 August 1999 (ex. MP11, Affidavit of Mr Peldan filed
12 November 2004);(c)As at the time of Mr Meller’s payment, near two years of tax was owing by KLAT Pty Ltd;
(d)Payment of the outstanding tax could only be made by Mr Mellers raising funds privately of which fact the Respondent was kept aware (paras. 11h, I, j, l, o, affidavit of Mr Yeo filed 5 August 2004);
(e)Only some 9 months after Mr Meller’s payment, KLAT Pty Ltd was in serious financial difficulties being unable to comply with a statutory demand dated 19 March 2003 served by the Respondent in the sum of $343,833.94. That statutory demand shows liabilities dating back to 14 August 2000 (para. 10 & ex.MP10, affidavit of Mr Peldan filed 12 November 2004);
(f)Accordingly only some 12 months after Mr Meller’s payment, KLAT Pty Ltd was in fact wound up by the Respondent in insolvency (para. 11.4 & ex.MP10, affidavit of Mr Peldan filed 12 November 2004).”
KLAT Pty Ltd had no capacity to pay its debts to the Respondent and the “value” of the forbearance from winding up at that time was nil. It may have had some “special value” so the transferor in his subjective opinion, but that is not relevant.
Not other basis for avoiding the operation of s.120 of the Act has been established in respect of the payment of $181,476.10.
Because I have found there was no consideration which the Respondent gave to the Transferor, no refund of consideration under s.120(4) applies.
The Trustee is entitled to a declaration under section 120 of the Act, to the extent of the payment made of $181,476.10. I make the orders as set out at the commencement of these reasons.
I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Baumann FM
Associate:
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