Schmierer v The Commissioner of Taxation

[2002] QSC 133

SUPREME COURT OF QUEENSLAND

CITATION:

Schmierer v The Commissioner of Taxation [2002] QSC 133

PARTIES:

TREVOR JOHN SCHMIERER
(Plaintiff)
v
THE COMMISSIONER OF TAXATION
(Defendant)

FILE NO:

9727 of 2001

DIVISION:

Trial

DELIVERED ON:

Thursday 16 May 2002

DELIVERED AT:

Brisbane

HEARING DATE:

29 April 2002

JUDGE:

Chesterman J

ORDER:

1.   That the defendant pay to the plaintiff the sum of $38,404.99 together with simple interest at 10 per cent from the date of each preference payment referred to in paragraph 5 of the judgment until the date of judgment

2.   That the defendant pay the plaintiff’s costs of and incidental to the action and application to be assessed on the standard basis

3.   That the application by the defendant for judgment against the directors of Gonund Pty Ltd (in liquidation) be adjourned to a date to be fixed and that the costs of and incidental to that application be reserved

CATCHWORDS:

CORPORATIONS LAW – Liquidation – Preference actions – Where plaintiff sought order that payments were unfair preferences – Whether there were reasonable grounds to suspect that the company was insolvent – Whether payments constituted payment to a running account

Corporations Act, s 588FA, s 588Ff, s 588FG(2), s 588FG(3), s 588FG(4), s 588FG(5)
Uniform Civil Procedure Rule 292

Airservices Australia v Ferrier (1996) 185 CLR 483, (distinguished)
Queensland Bacon Pty Ltd v Rees (1965-1966) 115 CLR 266, (applied)
Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110, (cited)

COUNSEL:

Mr M. Williams for the applicant
Mr C.D. Coulsen for the respondent

SOLICITORS:

Thompson Hannan Lawyers for the plaintiff

The Commissioner of Taxation for the defendant

1. CHESTERMAN J:  The plaintiff is the liquidator of Gonund Pty Ltd (in liquidation) (“the company”).  On 1 November 1999 he was appointed administrator of the company but on 26 November 1999 its creditors resolved to wind it up and appoint the plaintiff as liquidator.  The company carried on the business of hiring out cranes to building contractors.  It owned one crane and leased several others. 

1. The relation-back day in relation to the liquidation is 1 May 1999. 

1. There is convincing evidence that the company was insolvent from at least 1 May 1999 and probably from January of that year.  The ratio of its current assets to current liabilities stood at .35 in January and decreased during the year.  This means that its liabilities were never less than three times greater than its assets.  It had a deficiency of working capital on 31 January 1999 of just over $100,000.  The position deteriorated month by month until on 31 October 1999 the deficiency stood at $491,668.  Over the same period the deficiency of assets over liabilities increased from ($72,155) to ($471,393).  The company made a slight profit in January 1999 but made losses in each of the following months to October.  From April 1999 onward the average age of the debts which the company owed to its creditors increased steadily as a result of its lack of profitability combined with an absence of assets.  It had neither income nor capital with which to pay its debts. 

1. From 1 April 1998 until liquidation the company was registered as a group employer pursuant to the provisions of Division 2 of Part VI of the Income Tax Assessment Act 1936 and as an eligible paying authority pursuant to Division 3A of the same Act. As a consequence the company was obliged to make deductions from salaries and wages paid to employees and from prescribed payments made to subcontractors and to remit the total of the deductions to the defendant within 21 days after the end of the month in which the deductions were made.

1. The company had difficulty meeting its obligations to the defendant.  It did, however, make four payments which are the subject of the present application.  They were:

4 May 1999      -          $2,500
17 May 1999     -          $14,923.41
28 May 1999     -          $2,500
23 June 1999     -          $18,481.58
Total                 -          $38,404.99

1. By a claim dated 21 June 2001 the plaintiff seeks to recover from the defendant the total of the payments pursuant to s 588FF of the Corporations Act (“the Act”) on the ground that each payment was an unfair preference as defined by s 588FA.  The defendant has defended and put in issue:

(i)Whether the company was insolvent when the payments were made.

(ii)Whether as a result of the payments the defendant obtained a preference i.e. a payment greater than it would receive in respect of the debts paid if the payments were set aside and the defendant proved in the liquidation. 

(iii)Whether he received the payments in good faith and had no reasonable grounds for suspecting that the company was insolvent and that a reasonable person in his circumstances would have no such grounds for suspicion and that he provided valuable consideration for the payment. 

1. By an application dated 10 April 2002 the plaintiff sought orders that the defence be struck out and that judgment be entered pursuant to UCPR 292 which provides that:

“(1)A plaintiff may, at any time after a defendant files a notice  of intention to defend, apply to the court . . . for judgment . .

(2)        If the court is satisfied that –

(a)the defendant has no real prospect of successfully defending all or a part of the . . . claim;  and

(b)there is no need for a trial of the claim or part of the claim; 

the court may give judgment . . .”

1. The evidence which I have summarised disposes of the first issue.  It is convenient to deal firstly with the third which is rather simpler than the second. 

1. Section 588FG(2) of the Act provides that:

“A court is not to make under s 588FF an order . . . if . . . it is proved that:

(a)the person became a party to the transaction in good faith;  and

(b)at the time when the person became such a party:

(i)the person had no reasonable grounds for suspecting that the company was insolvent . . .;  and

(ii)a reasonable person in the . . . circumstances would have had no such grounds for so suspecting;  and

(c)         the person has provided valuable consideration . . .”

Section 588FG(3) to (5) provide, in essence, that where payments said to be unfair preferences were made to the defendant to reduce a liability to pay tax the reduction is deemed to be valuable consideration. 

1. According to Kitto J in a passage much appealed to:

“A suspicion that something exists is more than a mere idle wondering whether it exists or not;  it is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’, as Chambers’ dictionary expresses it.  Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.   The notion which ‘reason to suspect’ expresses . . . is . . . of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes – a mistrust of the payer’s ability to pay his debts as they become due . . .”

Queensland Bacon Pty Ltd v Rees (1965-1966) 115 CLR 266 at 303.

1. The evidence establishes that from October 1998 the company was in arrears in paying deductions to the defendant.  On 5 January 1999 a director of the company, Mr Stones, telephoned an officer of the defendant to say that he “expected” that the company would be able to pay all outstanding arrears by the end of that month.  He explained that the company was “currently arranging refinancing” and that it “factored . . . debts through St George (Bank)”. The expectation went unrealised and on 2 February 1999 Mr Stones again spoke to the officer to advice that the company could not pay its debts “for another fortnight”.  Thirteen days later the company’s accountant spoke to the officer by telephone to advise that the company was “in monetary difficulties” and that its existing overdraft facilities were insufficient for its needs.  He said that the company “was applying to St George for a $50,000 overdraft” which he was confident of obtaining.  Five weeks later the accountant again telephoned to say that negotiations with the bank were continuing and that he hoped that the company would obtain a facility which would allow it to pay its debt to the defendant in full.  Three weeks later still an employee of the company telephoned the officer to request the defendant’s consent to an arrangement by which, for two months, the plaintiff would pay debts which fell due in that period and, at the end of the period would advise the defendant whether it had succeeded in borrowing moneys to enable it to pay outstanding arrears. 

1. The material does not reveal whether the defendant consented to the arrangement but the payments in question were made following the conversation.  The two payments each of $2,500 were appropriated by the defendant to reduce arrears of group tax and prescribed payments and penalties for the months of October and November 1998.  The larger payments were appropriated to pay in full the deductions payable in April and May respectively. 

1. On 2 June 1999 the same employee telephoned the officer to request an arrangement by which the outstanding deductions might be paid over three months, effectively requesting a moratorium for that period.  The officer refused and threatened that if payments were not made the defendant would issue penalty notices to the company’s directors which would make them personally liable for the outstanding tax.  There were no further negotiations until after 23 June when the last payment was made.

1. The evidence which I have rehearsed must, in my opinion, have given rise in the defendant’s officer an apprehension or fear that the company could not pay its debts as they fell due.  The parties did not bother to put before the court a full picture of the state of accounts between the company and the defendant but it appears from the material that the company did not pay deductions after October 1998 except for the impugned payments in respect of April and May 1999.  In February and March the defendant was told expressly that the company could not pay its debts because it did not have the money and that it would not be able to pay unless it could borrow a sufficient sum.  The defendant received no indication that the company’s attempts to borrow had been successful.  On 22 March he was told that negotiations were continuing which meant, obviously, that no facility had been obtained although an approach had been made more than five weeks earlier.  On 13 April the defendant was told that the company would not know until mid June whether it had succeeded in “refinancing”.  On 2 June the Commissioner was asked to accept two small amounts in reduction of the company’s debts over three months at the end of which the company promised to pay the outstanding balance.  In context this can only have meant that the company had not been able to borrow the hoped for amount. 

1. This evidence was sufficient to give rise to more than “a slight opinion” that the company was insolvent.  It did not pay its debts which continued to grow and gave as its reason lack of money.  The only indicated possibility for a payment was a bank advance which the defendant knew had not materialised by the end of June.  The defendant had reasonable grounds for suspecting that the company was insolvent and a reasonable person in its circumstances would certainly have entertained the suspicion.

1. By his second contention the defendant seeks to assimilate his position to that of a trader who conducts a running account with a customer who ultimately becomes insolvent.  Cases of the highest authority have established that where payments are made on such an account in return for the supply of further goods or services there is no preference (at least where the price represents fair value of the goods and services).  See e.g. Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 and Queensland Bacon.  The defendant’s submission is that the impugned payments were of the same character and therefore cannot be regarded as preferences. 

1. The defendant relies heavily upon the decision in Airservices Australia v Ferrier (1996) 185 CLR 483, but a consideration of the majority judgment in that case reveals the true explanation why payments made on a running account are not ordinarily preferences and shows that the defendant’s submission is misconceived. Dawson, Gaudron and McHugh JJ said (504-5):

“Since the decision . . . in Richardson . . . the term ‘running account’ has achieved almost talismanic significance in determining when the ultimate, rather than the immediate and isolated, effect of  payment is to be examined.  . . .  However, the significance of a running account lies in the inferences that can be drawn from the facts that answer the description of a ‘running account’ rather than the label itself.  A running account between traders is merely another name for an active account running from day to day, as opposed to an account where further debits are not contemplated.  The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded.  Ordinarily, a payment, though often matching an earlier debit, is credited against the balance owing in the account.”

The reason why payments on a running account are not ordinarily preferences is that they are made in return for the supply of further goods and services which are of value to the payer.  There is no net benefit to the payee by reason of the payment.  It has parted with goods or services to the value of the payment.  If the transaction was set aside it would disgorge the money but recover the goods or services.  Without that element the payment would be a preference because it would go only to discharge an existing debt.  The judgment continues:

“If the record of the dealings . . . fits the description of a ‘running account’, that record will usually provide a solid ground for concluding that they conducted their dealings on the basis that they had a continuing business relationship and that goods or services would be provided and paid for on the credit terms ordinarily applicable . . .   A court will usually be able to conclude that the parties mutually assumed that from a business point of view each particular payment was connected with the subsequent provision of goods or services in that account . . .  Thus, it is not the label ‘running account’ but the conclusion that the payments in the account were connected with the future supply of goods or services that is relevant.”

1. Airservices was a statutory corporation which provided air navigation services to commercial airlines.   It charged for those services and was given statutory powers, including the imposition of liens on aircraft, to enforce payment.  It provided those services to an airline, Compass, which was in financial difficulty and paid debts it owed for services in a tardy and peace-meal fashion. 

1. In 502 their Honours said:

“If the sole purpose of the payment is to discharge existing debt, the effect of the payment is to give the creditor a preference over others . . .  if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired . . . If the purpose of the payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors . . .  Thus, a debtor does not prefer a creditor to other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment.”

At 507 it was said:

“Throughout the six month period, Airservices provided Compass with services whose value far exceeded the value of the payments that Compass made during that period . . .  Although individual payments were appropriated to specific debts and penalties, from a business point of view each payment must be considered to be connected with the subsequent provision of services by Airservices.  Compass harboured no illusion that it was a free rider on the public purse.  Nor did it make the payments, payments that stretched its liquidity to the limit, merely because it wished to clear the backlog of debt.  It understood only too well that the payments were the price that it had to pay if its planes were to continue to fly . . . Its strategy was to pay the oldest debts so as to ensure that it could stay in business . . .  The connection between the payments and the provision of services . . . is . . . readily apparent.”

1. The case makes it clear that “a running account” is not a shibboleth which guarantees to a transaction immunity from attack pursuant to s 588FF of the Act.  When a payment is attacked the court is required to ascertain whether it was made in return for something of equal value.  Where there is an ongoing relationship between traders and payments are made and goods are supplied in the circumstances described in the judgment, then a further conclusion is appropriate.  The immediate problem for the defendant is that it is not a provider of goods or services.  By no stretch of the imagination can it be said that the company made the payments to obtain goods or services essential to the conduct of its business.  It got nothing in return.  Sections 588FG(3) to (5) do not assist the defendant.  They merely overcame the difficulty that otherwise the defence provided by s 588FG could not apply to the defendant.  They do not convert it into a supplier of goods and services. 

1. Accordingly I am satisfied that the payments were unfair preferences.  I order that the defendant pay to the plaintiff the sum of $38,404.99 together with simple interest at 10 per cent from the date of each payment to that of judgment.  I further order that the defendant pay the plaintiff’s costs of and incidental to the action and application to be assessed on the standard basis.

1. In anticipation of this result the defendant has issued third party notices against the directors of the company pursuant to s 588FGA of the Act and has applied for judgment against them.  I order that that application be adjourned to a date to be fixed and that the costs of and incidental to it be reserved.