Blair Pleash in his capacity as liquidator of Gladstone Civil Pty Ltd and Anor v Commissioner of State Revenue [2017] QDC 229

DISTRICT COURT OF QUEENSLAND CITATION: Blair Pleash in his capacity as liquidator of Gladstone Civil Pty Ltd and Anor v Commissioner of State Revenue [2017] QDC 229 PARTIES: BLAIR PLEASH in his capacity as liquidator of Gladstone Civil Pty Ltd ACN 081893414 (in liquidation) (First Plaintiff) And GLADSTONE CIVIL PTY LTD ACN 081893414 (in liquidation) (Second Plaintiff) And COMMISSIONER OF STATE REVENUE (Defendant) FILE NO/S: BD1906/14 DIVISION: Civil PROCEEDING: Trial ORIGINATING COURT: District Court of Brisbane DELIVERED ON: 11 September 2017 DELIVERED AT: Brisbane HEARING DATE: 1 March 2017, 2 March 2017 JUDGE: K J O’Brien CJDC ORDER: The plaintiff’s claim is dismissed. CATCHWORDS: d LEGISLATION: CORPORATIONS – GENERALLY – CORPORATIONS LEGISLATION – Corporations Act 2001 – ss 588FF and 588FG – where the first plaintiff is the liquidator of the second plaintiff – where the second plaintiff made payments in respect of outstanding payroll tax – where a payment arrangement was made – where no other indication from the company that it could not or would not pay its debt – whether commissioner acted in good faith in receiving payments – whether at the time of receipt of payments no reasonable grounds to suspect company was insolvent – whether a reasonable person in the circumstances would have no such grounds for so suspecting. -- 1 of 17 -- 2 CASES: Corporations Act 2001, ss 588FF and 588FG Tax Administration Act 2001, s 87 Chicago Boot Co Pty Ltd v Davies and McIntosh (as joint and several liquidators of Harris Scarfe Ltd) (2011) SASCFC 92 Cussen & Anor v Commissioner of Taxation (2003) 177 FLR 185 Cussen & Ors v Sultan and Ors (2009) NSWSC 1114 Dean-Willcocks v Commissioner of Taxation (2008) NSWSC 1113 Downey v Aira Pty Ltd (1996) 14 ACLR 1068. Metcalf Crane Services Pty Ltd v Gideon Rathner (in his capacity as liquidator of Consolidated Construction Group Vic Pty Ltd) and Anor (2011) VSC 195 Olifent v Australian Wine Industries Pty Ltd (1996) 19ASCR 285 Sutherland v Eurolinx Pty Ltd (2001) 37ACSR 477 COUNSEL: Mr GW Dietz for the plaintiffs Ms MH Hindman for the defendant SOLICITORS: HWL Ebsworth for the plaintiffs Crown Solicitor for the defendant [1] The plaintiffs’ claim in this action is for the sum of $198,749.56 pursuant to s.588FF(1)(a) of the Corporations Act 2001 (the Act), being a claim for the recovery of an unfair preference. [2] The first plaintiff is the liquidator of the second plaintiff company (the company) and the amount claimed is the total of two payments received by the defendant in respect of outstanding payroll tax on 22 July 2011 and 2 August 2011 (the payments). [3] It is agreed between the parties that the elements of the plaintiffs’ claim are satisfied and the only remaining issue is whether the defendant has a defence pursuant to s.588FG(2) of the Act. That section relevantly provides:- “(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and -- 2 of 17 -- 3 (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 at the time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction. (3) For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to pay tax, the discharge is valuable consideration provided: (a) by the person to whom the tax is payable; and (b) under any transaction that consists of, or involves, the payment or application. (4) In subsection (3): tax means tax (however described) payable under a law of the Commonwealth for of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates.” [4] It is accepted that the payments constituting the relevant transactions are not “an unfair loan to the company, or an unreasonable director-related transaction of the company”. It is further accepted that s.588FG(3) has the effect that valuable consideration was provided for the payments and it is no part of the plaintiffs’ case that there were reasonable grounds for suspecting that as a consequence of making the payments the company would become insolvent.1 [5] In consequence, the issues in contention are whether the defendant can prove:- 1. That the Commissioner (through the relevant officers of the Office of State Revenue (OSR)) acted in good faith in receiving the payments; and 2. That at the time of the receipt of those payments the OSR officers had no reasonable grounds for suspecting that the company was insolvent; and 3. That a reasonable person in the OSR officers’ circumstances would have no such grounds for so suspecting. Factual Overview [6] In about June 2009 the company, which was then unregistered for payroll tax purposes, came to the attention of the OSR through what appears to have been a routine audit process undertaken by an investigations officer Mr Matthew Crowley. Mr Crowley concluded that the company should be registered for payroll tax and that it would be liable to pay such tax for historical periods. Assessing the 1 Second further amended statement of claim paras.44.1 and 44.2 -- 3 of 17 -- 4 company’s tax liability required a consideration of information to be provided by the company in relation to such matters as the number of employees, the number of apprentices and the number of independent contractors engaged by the company, and on 26 June 2009 Mr Crowley wrote to the company informing it of the audit process and of the payroll tax obligations of a company where taxable wages for a financial year exceeded a particular threshold.2 [7] On 25 August 2009 the company’s internal accountant, Mr Troy Nunan, responded to this letter and provided documentation sought by the OSR. Over a period of some months Mr Crowley then engaged with Mr Nunan endeavouring to explain the requirements of the relevant legislation and to obtain the necessary information. [8] The audit process resulted ultimately in the company being registered for payroll tax and, on 24 February 2010, the company was issued with Payroll Tax Default Assessment Notices covering the period from 1 July 2006 to 31 July 2009 and five Assessment Notices covering the period August 2009 to December 2009.3 [9] The total amount of payroll tax owing under those assessments was approximately $610,000 (the primary debt). These notices were based on the information provided by the company. The “default” Assessment Notices included an amount of penalty tax appropriate to those periods when the company ought to have been registered for payroll tax purposes but was not so registered.4 Subject to Mr Nunan providing the necessary wage figures for January 2010, Mr Crowley now regarded the payroll tax investigation as being complete.5 [10] On 2 March 2010 however, Mr Crowley was contacted by Mr Troy O’Keefe who introduced himself as the company’s “external accountant”. Mr O’Keefe was unaware of the assessment notices and made reference to “paying off the debt”.6 Mr Crowley then sent to him a copy of the letter previously sent to Mr Nunan on 24 February 2010. He also provided a link to the OSR website in relation to payment arrangements.7 [11] On 11 March 2010 Mr O’Keefe expressed concerns via email, commenting that “the assessments may have been based on incorrect figures”.8 [12] On 11 May 2010 Mr O’Keefe contacted Ms Alison McDonnell, a collections officer with OSR, making reference to the dismissal of the company’s previous accountant and proposing a “payment arrangement” whilst the audit was being finalised. On that same date Mr O’Keefe also spoke with Mr Crowley expressing concern about the performance of the company’s previous accountant.9 [13] The OSR decided to treat these conversations as applications for reassessment of those assessments previously made on 24 February 2010.10 2 Affidavit Matthew John Crowley (MJC) para.7 3 Affidavit MJC paras.25-27 and Exhibit MJC-13; Affidavit Donald Richardson Smith (DRS) para 5 and Exhibit DRS1 4 Affidavit MJC para.26 5 Affidavit MJC para.27 6 Affidavit MJC para.28 7 MJC para.30 and Exhibit MJC-15 8 Exhibit MJC-16 9 Affidavit MJC para.34 10 Affidavit MJC para.35 -- 4 of 17 -- 5 [14] This reassessment process would look not only at those historical default assessments, but would encompass further assessments up to the date that any reassessments were issued.11 Mr Crowley’s evidence is as follows:- “So like with the initial investigation process, the intention was that assessments would issue up to a date (for all prior periods) and then the company would commence the process of monthly self-assessment thereafter. I do not recall being aware that the company had not lodged self-assessments after February 2010, but I did not expect the company to lodge monthly self-assessments until the reassessment process was complete. I do not recall (and have no record of) telling the company that it was not required to lodge monthly self-assessments until the reassessment process was complete. The company lodging monthly self-assessments whilst its payroll tax liabilities was being reviewed could result in further reassessments of those monthly self-assessments being required, which was not desirable. My focus was on obtaining proper documents from the company so that reassessments and assessments could be made to bring the company up to date, so that it could thereafter lodge self-assessments in the ordinary manner.”12 [15] There followed then, over a period of some months, discussions between Mr Crowley and Mr O’Keefe concerning documentation required for the reassessments. In the meantime the company, being now registered for payroll tax purposes, had not been complying with its obligations to lodge monthly self-assessment returns. As noted above, Mr Crowley had not expected that the company would lodge such notices until the assessment process was complete. Notwithstanding Mr Crowley’s expectation however, automated assessment notices began issuing automatically when the self-assessment notices were not received. In addition a number of automated letters of demand, known within the OSR as “Dunning letters”, were directed to the company.13 Notwithstanding this however, no recovery action was actually commenced against the company whilst the reassessment process was being undertaken. [16] Mr Crowley ultimately became dissatisfied with the company’s response to his requests for information and on 18 March 2011 “in a last opportunity to provide…. the necessary documents to carry out the reassessment”14 he caused to be issued a notice pursuant to s.87 of the Tax Administration Act 200115. [17] It became apparent to Mr Crowley as a consequence of a meeting on 30 March 2011, that Mr O’Keefe “did not appear to understand basic payroll tax issues”16. Information was then sought and obtained from the Australian Tax Office and on 24 June 2011 Ms Rebecca Brownlie, a collections officer within OSR contacted the company through its manager making reference to the assessment notices and requiring immediate payment of all outstanding payroll tax. The communication made reference to the option of entering into a payment arrangement, including a proposal to pay the outstanding amount by instalments, stating that 20% payment 11 MJC para.36 12 MJC para.36 13 Affidavit Rebecca Jane Browing (RJB) paras. 6-10 14 MJC para.64 15 Exhibit MJC-41 16 MJC para.65 -- 5 of 17 -- 6 “must accompany the application” which must be received by close of business on Friday, 18 November 2011.17 The letter further stated that in order to approve a payment arrangement the Commissioner must be satisfied that payment in full at the required time “will cause the company or trustee significant financial hardship”. [18] On 4 July 2011 a solicitor acting for the company sought and was granted an extension of one week until 15 July 2011.18 On 8 July 2011 the collections officer Ms Brownlie, received the following email communication from the company’s solicitor:- “Further to our telephone discussion this morning in this matter, the query which I seek to clarify is: If the client wishes to make the initial 20% payment of current assessed liability in anticipation of submitting an application for a payment arrangement, but defer said application for a payment arrangement until liability is reassessed by OSR – can the client rely on the aforesaid payment in satisfaction of the application requirement. I’ve been advised that the chartered accountants who have been retained by the client anticipate submitting to the OSR all necessary documents for assessment for the periods up to June 2011 no later than Friday 29 July 2011. Therefore it is anticipated that the time period between payment and submitting said application would be a reasonable time to submit said application after receiving finalised assessment notice/s.”19 [19] Ms Brownlie replied as follows on 8 July 2011:- “Thank you for your emails. I have had clarification from management to advise that 20% payment for BP1093551 ($922,107.72) will be great. And as discussed we can set up a payment arrangement shortly after.”20 [20] On 7 July 2011, the company’s solicitors requested and were granted an extension for payment of the 20% until Friday, 22 July 2011. On that date, 22 July 2011, one- half of the 20% payment being an amount of $99,374.78 was made. Then, on 2 August 2011, a similar payment in that same amount was received by the OSR. Thereafter Mr Crowley continued to liaise with the company’s new accountants and in late August 2011 received the comprehensive information which enabled him to generate assessments and reassessments up to 30 July 2011. These were forwarded to the company on 1 September 2011. Section 588FG(2) [21] It is at once accepted that the responsibility for proof of the defence created by this section lies with the defendant in respect of each of the payments. Good Faith 17 Affidavit RJB para.22, Exhibit RJB-2 18 Affidavit RJB para.24 19 Exhibit RJB-5 20 Exhibit RJB-6 -- 6 of 17 -- 7 [22] The expression “good faith” as used in s588FG is not defined in the Act. It is to be given its natural meaning. In Cussen & Ors v Sultan and Ors (2009) NSWSC 1114 Nicholas J said at para 33 – para 34: “Section 588FG(2)(a) requires proof that a person became a party to the transaction in good faith. There is no presumption in the defendant’s favour. The defendant must establish a positive. The plaintiff is not required to prove the absence of good faith. The term ‘good faith’ is to be given its natural meaning, namely to act with propriety and honesty. This component of the defence imposes a subjective test: Sutherland v Eurolinx Pty Ltd (2001) 37ACSR 477; (2001) NSWSC 230 at para 39; Downey v Aira Pty Ltd (1996) 14 ACLR 1068 at 1075. The concept of good faith is a concept separate from the requirements of s588FG(2)(b); Olifent v Australian Wine Industries Pty Ltd (1996) 19ASCR 285 at 290; 130 FLR 195 at 200. The concept of “good faith” encompasses notions of honesty of purpose, motive or intention which actuated the defendant to become a party to the impugned transaction. The concepts are interchangeable. To show that a person became a party to the transaction subjectively in good faith it is necessary to prove that the motive which actuated the person to do so was honest and proper. The inquiry, accordingly, is directed to the party’s state of mind, with regard to his knowledge and belief about the nature of the transaction at the relevant time.” [23] In Olifent v Australian Wine Industries Pty Ltd (1996) 19 ASCR 285 at 290 Burley SCM considered the concept of “good faith” in s588FG as follows: “Section 588FG(2) seems to differ from s122 of the Bankruptcy Act in that, under the latter, good faith is negatived by proof that the creditor knew or had reason to suspect that the debtor was insolvent and that the effect of the transaction would confer a preference, priority or advantage over other creditors, whereas the former provides the defence if it is proved that the transaction was entered into in good faith and that at the same time the defendant creditor had no reasonable grounds for suspecting that the debtor company was insolvent or would become insolvent and that a reasonable person in the defendant creditor’s circumstances would have had no such grounds for so suspecting. Given the structure of the section, it seems to me that ‘good faith’ is not confined to an examination of whether or not insolvency was in view when the payments were made. The concept of ‘good faith’ is identified as a separate concept from the requirements of s588FG(2)(b) and consequently, it must be, in my opinion, be given its ordinary meaning of propriety and honesty.” Section 588FG(2)(b) [24] Section 588FG(2)(b) encompasses a two-fold requirement. In the circumstances of the present case, the first is that the Commissioner, through OSR Officers, should have no reasonable grounds for suspecting that the company was insolvent at the time of the receipt of the payments. The second requirement is that a reasonable person in the Commissioner’s circumstances should have no reasonable grounds for suspecting that the company was insolvent. This second limb necessarily requires an examination of the actual knowledge of the Commissioner at the relevant time, but assigns that knowledge to the reasonable person. The difference in the two -- 7 of 17 -- 8 limbs of the section was considered by Barrett J in Dean-Willcocks v Commissioner of Taxation (2008) NSWSC 1113 at para 10 as follows: “As Bryson J pointed out in Mann v Sangria Pty Ltd (2001) NSWSC 172 the first of these inquiries is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by the Commissioner, while the second is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by a reasonable person in the Commissioner’s circumstances. I do not think it is all that helpful to attempt to characterise one inquiry as ‘subjective’ and the other as ‘objective’. One should really approach the two inquiries according to the terms in which they have been expressed by the legislature. I would, however, respectfully endorse Bryson J’s observations at para [46] that ‘it would be seldom that the two tests would produce different results, although it is conceivable that a person might be afflicted by some personal difficulty in forming a suspicion.’ His Honour thus accommodates the possibility that the actual frame of mind of a particular person may be effected by factors to which the mind of the hypothetical “reasonable person” would be impervious, even though each formed a judgment on ‘reasonable grounds’. And the ‘reasonable person’ to whom regard is to be had is, as the Court of Appeal confirmed in Cussen as liquidator of Akai Pty Ltd v Commissioner of Taxation (2004) NSWCA 382, a ‘reasonable business person’.” [25] The fact that the defendant in this case is the Commissioner of State Revenue is not a factor of special significance in the application of the test contained within the second limb of s588FG(2)(b). The reference to “a reasonable person” in that subsection is a reference to the average business person. In Cussen & Anor v Commissioner of Taxation (2003) 177 FLR 185, Palmer J observed at para 64: “Mr Cotman’s submission is that, because of its internal policy on collection of tax debts, the ATO is in a special position which sets it apart from other creditors for the purpose of the defence under s588FG(2)(b)(ii). I do not think that this submission is supported by the authorities. As was emphasised by Austin J in Dean-Wilcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 at 572, the objective test implied by s588FG(2)(b)(ii) does not require an examination whether the particular creditor acting reasonably, would have had reasonable grounds for suspecting insolvency, with the consequence that if the creditor happens to be a bank (or a tax collecting authority) one asks whether a reasonable bank (or a reasonable tax collecting authority) would reasonably have had such a suspicion. Rather, whether or not the creditor would have reasonably had a suspicion is determined according to the presumed perception of ‘the ordinary person on the Bondi bus’: per Young J in Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543 at 545-546. That pithy phrase simply denotes that an objective test is to be applied and the standard of measurement is that of a hypothetical person who is assumed to have the knowledge and experience of the ‘average business person’, but certainly not the skills and experience of an expert financial analyst or someone with legal training or any other kind of tertiary education.” -- 8 of 17 -- 9 Reasonable Grounds of Suspecting [26] In determining whether a creditor ought to have a reasonable suspicion of insolvency, the court must look to all “the circumstances which exist at the time of payment and without the benefit of hindsight”.21 In Metcalf Crane Services Pty Ltd v Gideon Rathner (in his capacity as liquidator of Consolidated Construction Group Vic Pty Ltd) and Anor (2011) VSC 195 Robson J made reference to a number of relevant authorities at para 53 as follows: “In Sutherland v Eurolinx (2001) 37 ACSR 477 at [43], Santow J said that there need be no single factor which establishes the relevant suspicion but rather a combination of factors for and against must be balanced and the cumulative impact on the payee assessed. He said: ‘The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion. Rather it is a question of looking not in hindsight but through the contemporary eyes of the parties, at the commercial circumstances then prevailing between them. This is to identify in that context those factors pointing towards insolvency of the debtor. This in turn is in order to ascertain which of those factors were apparent to the payee, and then the cumulative impact that knowledge of them should have had, or did have, upon the payee. There will also be potentially countervailing factors and circumstances to be weighed in the balance which could have tended to dispel suspicion at the time.’ In Sparad (No 100) Ltd v JB Harkness, Priestly JA warned against placing undue weight on dilatory payment, and observed that ‘debts are not always paid on time by insolvent traders’. In Sendel v Porter (1966) 115 CLR 666 at 670 Barwick CJ warned that ‘the conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity.’” Plaintiff’s submissions [27] From as early as February 2010, the company had incurred a very significant tax liability that was at all times due and owing to the Commissioner. The Commissioner – and the Commissioner’s knowledge for present purposes is the sum total of the knowledge of all its officers – ought to have known from the financial records provided that the company had other additional tax liabilities. Notwithstanding an initial request that a payment arrangement be entered into, no payment of tax was made by the company until the two payments of July and August 2011. The company had failed to comply with requests and demands from the Commission to produce relevant documentation and, on occasions, provided information which was regarded as inadequate or unsatisfactory. Most significantly, it is argued, are the communications of late June and early July 2011 21 Chicago Boot Co Pty Ltd v Davies and McIntosh (as joint and several liquidators of Harris Scarfe Ltd) (2011) SASCFC 92 at [23] -- 9 of 17 -- 10 involving as they do reference to “significant financial hardship”, and the requests for extensions of time with only limited payments being made. The Commissioner, it is submitted, plainly had reasonable grounds for suspecting that the company was insolvent at the time of each payment and further, a reasonable person in the Commissioner’s circumstances and with the Commissioner’s knowledge would have had reasonable grounds for suspecting that the company was insolvent at the time of each of the payments. In those circumstances, it is argued, the Commissioner has failed to prove that it acted in good faith. Defendant’s submissions [28] The company’s concern as of March 2010 had been with the accuracy of the information provided by the previous accountant, Mr Noonan. What followed was a lengthy period of liaison during which the Commissioner, through Mr Crowley, indicated a willingness to undertake re-assessments if such re-assessments were justified by the “correct figures”. The fact that the primary debt remained unpaid is explicable in circumstances where the company was seeking a re-assessment. The financial records of the company as revealed to the Commissioner demonstrate a surplus of assets over liabilities and an increasing trading profit. The company provided no indication that it was unable to pay its debts, simply that it was seeking a payment arrangement until the re-assessments were finalised, demonstrating, at very worst, a cash flow difficulty. There was no information known to the Commissioner or conduct of the company that made it desirable or necessary to make further enquiries. The Commissioner has acted with propriety and honesty and the requirements of s88FG(2)(b) have been established, there being no reasonable grounds for the Commissioner or the reasonable person to suspect the company’s insolvency at the time of receipt of the payments. Discussion [29] The evidence given by the witnesses in this case has not been the subject of any real challenge. There is no reason to suppose that any of the witnesses were doing other than giving truthful evidence to the best of their ability. Nor is there any reason to suppose that the documentation produced and referred to by the witnesses presented other than a comprehensive and exhaustive record of all relevant documentation in the possession of the Commissioner. [30] The plaintiff places considerable reliance upon the conversations which took place between Miss Brownlie and the company on and after 24 June 2011. As indicated above22 Ms Brownlie, a collections officer within OSR contacted the company through its manager making reference to the assessment notices and requiring immediate payment of all outstanding payroll tax. The email communication included the following:23 “I understand that you are the manager and therefore responsible for the payment of Payroll Tax. Some of these assessments date back to the 2007 financial year. As per the Assessment Notices you were issued, if you disagreed with any of the assessment amounts, you are required to lodge an objection within 60 days 22 Para.17 23 Affidavit RJB para 22: Exhibit RJB2 -- 10 of 17 -- 11 after service of the Assessment Notice in accordance with Part 5 of the Taxation Administration Act 2001. Payment in full is required immediately for all outstanding Payroll Tax. Alternatively you may enter into a payment arrangement, including a proposal to pay the amounts by instalments. In order to approve a payment arrangement the Commissioner must be satisfied that payment in full at the required time will cause the company or trustee significant financial hardship. To decide an extension of time to pay the Payroll Tax liability, the Commissioner must be satisfied will cause significant financial hardship, however interest will accrue from the date due at 12.8% per annum calculated daily. The repayment proposal must be included in the application. You will find a TA2-Application for a Payment Arrangement Form for a company/trustee. You must read and understand the general terms and conditions found in the application. One of these conditions is all future liabilities be paid on time. Please also note that a projected cash flow of the business for the next 6 months, as well as balance sheets and profit and loss accounts for the 3 previous years are required to be submitted with your application, should you apply to pay in instalments exceeding 3 months, else no supporting documentation is required. A payment equivalent to at least 20% of the debt must accompany the application if you apply to pay in instalments exceeding 3 months (negotiable depending upon client’s financial situation). This application with all supporting documentation and direct debit forms must be completed and submitted by email or fax by close of business on Friday, 8 July 2011.” [31] What follows is that on 4 July 2011, the company’s lawyer contacted Ms Brownlie seeking an extension for “one more week”. Other requests for an extension followed before the payments were made. The submission of Mr Dietz for the plaintiffs is that these events provide telling evidence of the knowledge of the Commissioner as to the company’s financial affairs. He relies in particular on the evidence of Ms Brownlie in cross-examination24 that reference to financial hardship generally meant that the client was unable to pay its debts as and when they become due. The cross-examination of Ms Browlie continued as follows:25 “So the phrase, ‘a significant financial hardship,’ has a particular meaning within the Office of State Revenue in respect of Payroll Tax and paying arrangements. Is that correct? - - Well, we have an internal policy that we need to go by, yes. And it’s by that policy, which, essentially sets the definition of what the Commissioner considers to be significant financial hardship? - - Yes. 24 T1-69 ln 35 25 T1-69 -- 11 of 17 -- 12 And that policy is the document which is exhibited at number 3 to your affidavit? - - Yes.” [32] It is clear that it is that exhibit, PJB3, that sets out the OSR internal policy for Instalment Payment Arrangements. That document includes the following: “This policy describes the administration of Instalment Payment Arrangements (“Payment Arrangements”) arising in connection with taxes, grants or subsidies administered by the Office of State Revenue. Generally, Payment Arrangements are approved and managed where debtors have demonstrated their inability to pay their debts on time due to significant financial hardship. …. 3. The company/trust under ‘significant financial hardship’ means the company/trust is unable to generate funds internally or from another source to meet its liabilities immediately without having an impact on the viability of the company/trust/business. 4. The Commissioner of State Revenue (the Commissioner) accepts that some debtors may occasionally experience cash flow difficulties that will prevent them from paying their debt on time. In those isolated instances, the Commissioner will consider requests to accept payment of the debt by instalments over a period of time. 5. The Commissioner is of the view that debtors have a responsibility to manage their cash flow to ensure they meet all debts when those debts fall due for payment, including expected tax related liabilities or obligations. It would be unusual for the Commissioner to grant a payment arrangement to those who continually fail to pay on time or fail to meet their lodgement obligations on time. In making a decision on whether to accept payment by instalments, the Commissioner will consider all available behavioural information and reasons for any previous non-compliance. …. 11. Section 34 of the TAA allows the Commissioner to approve an arrangement for paying an amount under a tax law by way of instalments. The payment arrangement must be in writing and state the conditions. The Commissioner must be satisfied that full payment by the assessment due date will cause the tax payer significant financial hardship. From 1 July 2005 if a Payroll Tax liability arises before 1 July 2005 s34 will commence to operate by virtue of ss 59 and 62 of the Payroll Tax Act 1971. …. 23. Responsibility for demonstrating that payment cannot be made by the due date rests solely with the debtor. A request for a Payment Arrangement will be assessed on its merits and only granted where the debtor has demonstrated the ability to service the proposed Payment Arrangement. However, the following criteria (listed in Items 24-54) are mandatory for Payment Arrangements. 24. In determining the viability of the business and whether the approval of a Payment Arrangement or the ability to service a Payment Arrangement will -- 12 of 17 -- 13 affect the viability of the business, the Commissioner will take the following matters into consideration: (a) The information provided by the debtor and other information that may be held (or obtained) by the Commissioner; (b) The circumstances that led to the inability to pay; (c) The debtor’s current financial position, including other current payment obligations and actions taken by the debtor to rearrange finances or borrow to meet the debt; (d) The stage legal recovery action has reached and the grounds put forward by the debtor to justify deferring legal action; (e) The offer made and the ability to make payment of the debt (including the additional charges for late payment imposed by the legislation) on those terms without seriously impacting on the ability to meet other obligations; (f) The solvency of the debtor and arrangements with the other creditors (arm lengths or otherwise) to pay debts; (g) Compliance with other taxes, grants or subsidies, obligation or commitments (for example, whether all Payroll Tax lodgement obligations are up to date); (h) Whether there are alternative collection options that may result in payment in a shorter time frame (for example, the use of ‘garnishee’ provisions); and (i) The willingness of the debtor to accept the terms and conditions under which the Commissioner will agree to accept payment by instalment. 25. A Payment Arrangement will only be granted where the Commissioner is satisfied that full payment will cause the debtor significant financial hardship. 26. Upon reviewing the financial information provided by the debtor, if the debtor has the financial capacity to pay the amount outstanding, a Payment Arrangement will not be approved. 27. A request for a Payment Arrangement can be made before or after the due date for payment. If the payment due date has elapsed, a payment equivalent to at least 20% of the debt must accompany the application. However, if exceptional circumstances exist, the Commissioner may forego this last requirement.” [33] In my view the mere fact that information in respect of a payment arrangement was provided to the company, or even that the company indicated its intention to apply for such an arrangement, is not of itself sufficient to create a belief or suspicion as to insolvency. As Ms Brownlie testifies,26 her email communication of 24 June 2011 26 Affidavit RJB para 23 -- 13 of 17 -- 14 is based upon a template letter sent by OSR to debtors seeking a payment arrangement. The policy document recognises that traders will from time to time experience cash flow difficulties or a temporary lack of liquidity. [34] As noted above,27 in determining whether a creditor ought to have a reasonable suspicion of insolvency, it is necessary to look to “the circumstances which exist at the time of payment and without the benefit of hindsight.” Traders may seek to enter into payment arrangements for reasons other than insolvency. [35] In Cussen & Anor v Commissioner of Taxation supra, Palmer J when speaking of Payment Arrangements made with the Australian Tax Office, said this at para 65: “I do not read the ATO’s Internal Procedures Manual as evidencing a policy which assumes that a taxpayer is insolvent before the ATO may grant an extension of time to make payments. However, even that were the ATO’s policy, it would be a policy peculiar to the ATO: it is not a policy or assumption which would be adopted as a matter of course by the ‘average business person on the Bondi bus’ who is asked to grant a debtor time to pay. The average business person makes no automatic assumption that a request for time to pay is, without more and of itself, a manifestation of insolvency rather than of temporary illiquidity. Far more must be known before one can reasonably have ‘a positive feeling of actual apprehension’, amounting to a suspicion, that a person is insolvent: per Kitto J in Queensland Bacon Pty Ltd v Rees (1996) 115 CLR 266 at 303. As Santow J said in Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 at 483: ‘The case law illustrates that there is no single factor whose presence invariably establishes that there was, or should have been, the requisite suspicion (of insolvency).’ Further, as Priestley JA said in Sparad (No 100) Ltd v Harkness (unreported) Court of Appeal, NSW 40665 of 1993, Priestley, Clarke JJA and Abadee AJA, 14 February 1997) at 20, undue weight cannot be placed on dilatory payment because “debts are not always paid on time by solvent traders”’. (My underlining) [36] In the present case, there was no indication from the company that it could not or would not pay its debt. The clear inference in my view is that the company was seeking a payment arrangement to be put in place until the reassessments were finalised. Indeed the email communication of 8 July 2011 referred to in para [18] above makes express reference to a 20% payment of current assessed liability in anticipation of submitting an application for a payment amount after “liability is reassessed by OSR”. The company had indicated a willingness to pay the required 20% part payment in support of the payment arrangement application. Some extensions were sought and granted, but the delays were not lengthy. Moreover, the company was proactive in seeking these extensions. [37] The fact that the company had not in the meantime paid its primary debt on lodged periodic monthly returns is in my view explicable in circumstances where consideration was being given to reassessments and to new assessments. As indicated above28 such lodgements were not expected by Mr Crowley since any 27 Para [26] 28 Para [14] -- 14 of 17 -- 15 reassessments he undertook would include new assessments to bring the company “up to date”. [38] It is argued for the plaintiff that, from the key company financial records, the Commissioner impliedly knew or ought to have known of the impact that the significant payroll tax debt would have on the company. It is important in my view to recognise that those records were provided not in support of an application for a Payment Arrangement, but solely for the purpose of assessment and re-assessment. Moreover, the important time so far as suspicion is concerned is the date of the payments, 22 July 2011 and 2 August 2011. The financial records provided here extended only to 30 June 2009. [39] In any event, the company balance sheet for the year ended 30 June 2007 indicated a net asset position of $131,933.00 while the trading profit and loss statement indicated an after tax profit for that year of $26,453.00. For the year ended 30 June 2008, the balance sheet showed a net asset position of $999,473.00 and a before tax profit of $867,540.00. [40] Amongst the documents provided by Mr Nunan at a meeting with Mr Crowley of 11 November 2009 was the company’s profit and loss statement29 which indicated a comparative operating profit after tax for the financial year ended 30 June 2008 of $371,054.00 and an operating profit after tax for the financial year ended 30 June 2009 of $1,782,712.00. [41] During cross-examination it was suggested to Mr Crowley30 that, relative to the figures contained within the company’s financial statements as disclosed to the Commissioner, the company “had significant tax liabilities”. Mr Crowley did not accept this, indicating that that would depend upon a review of other items contained within the company’s balance sheet and profit and loss statements. [42] The disclosure of the company’s financial statements occurred during the course of an audit process when the OSR was endeavouring to make an assessment of the company’s liability under the Payroll Tax legislation. As Mr Crowley indicated31 he “looked at items such as salary and wages, superannuation, sub-contractors, and then other lines that may suggest there maybe components of taxable wages that all go into this the assessable wage figure”. As indicated above, there were no records provided beyond the financial year ended 30 June 2009. Over the period to which they related, the records suggest a company whose net equity and trading profit was increasing. They do not in my view give rise to a reasonable suspicion of insolvency. [43] As indicated above, the audit process involving the company commenced in late June 2009 with a request for certain documentation relevant to Payroll Tax assessment. In August 2009, the company’s internal accountant, Mr Nunan, provided certain documentation in response to that request. The evidence of Mr Crowley32 is that it appeared from those documents that the company, and its representatives, did not properly understand Payroll Tax and, as a consequence, a meeting was held with Mr Nunan in November 2009 when further documentation 29 Affidavit MJC Exhibit 5 30 T1-16 ln6 31 T1-14 ln41 32 Affidavit MJC para 12 -- 15 of 17 -- 16 was provided. Additional information was sought and in the coming months Mr Nunan gave every indication of responding to those requests. No indication was given during this process that the company was other than solvent. The assessment notices of 2010 were issued on the basis of the information provided by him. [44] In March 2010, Mr Crowley was contacted by Mr Troy O’Keefe, the “external accountant” for the company who, it seems, had replaced Mr Nunan. Mr O’Keefe suggested that the information previously supplied may have been based on “incorrect figures” provided by “an ex-employee”. Importantly again, the company through Mr O’Keefe gave no indication of any inability to pay the debt, even suggesting a part payment agreement being put in place until the audit was finalised.33 [45] In his email communication of 11 May 2010, Mr O’Keefe added: “It should be noted that the Director has currently gone through a divorce process and the internal accountant who supplied the original figures to the Office of State Revenue has been dismissed hence we are asking for a review of the audit.”34 [46] Ultimately in March 2011, Mr Crowley, unhappy with the supply of information from Mr O’Keefe resorted to the provisions of the Tax Administration Act to obtain the information necessary to carry out the assessments and reassessments. This led to the events of June and July 2011 which are set out above. [47] I have set these matters in some little detail since it is argued for the plaintiff that this history of delay and apparent confusion on the part of the company must have, or at least should have, alerted the defendant as to the company’s financial difficulties. In the cross-examination of Mr Crowley the following exchange occurred:35 “Were you concerned about the company’s ability to manage its financial documents? - - No. But at this point in time you had been provided with several sets of inconsistent financial statements. Is that correct? - - What are the inconsistent financial statements you are referring to? Well, we’ve considered some financial statements previously which you accepted were different or inconsistent between one another that you had received earlier from the company in Exhibit Nos 3 and 4 to your affidavit? --- Yes. Yes. But I personally wouldn’t call them inconsistent. I would refer to the things printed off the system as preliminary to the settlement of the financial statement at a later date. And do you accept at this particular point in time that the company really is delaying in response to you in an unnecessary way? - - - As I say, they don’t know whether it’s the accountant or the client, but I think – I certainly had 33 Affidavit MJC para 73 Affidavit Alison Tracy McDonnell (ATM) para 13 34 Affidavit ATM Exhibit 2 35 T1-28 ln34 – T1-28 ln34 – T1-29 ln5 -- 16 of 17 -- 17 concerns about the accountant and, as you know, his – his responses to me, for example, in the fact that you know, he didn’t seem familiar with Payroll Tax.” [48] It is significant in my view that at no time throughout this entire process did the company give any indication that any problems it may have experienced with the audit process were in any way due to its financial position. There was ample ground in my view for the view expressed by Mr Crowley. Conclusion [49] I am satisfied that the defendant acted with “propriety and honesty” in the receipt of each of the subject payments. Those payments were in respect of a bona fide debt and there was nothing in the circumstances of their receipt to indicate that the company was insolvent or which justified the making of further enquiries in that regard. I am satisfied that the defendant became a party to these transactions in good faith. [50] I also find the requirements of s588FG(2)(b) to have been proven by the defendant. For the reasons set out above, I am satisfied that there were no reasonable grounds for the Commissioner or the reasonable person to suspect the company’s insolvency at the time the payments were made. [51] The plaintiff’s claim is dismissed. -- 17 of 17 --