Following on from our recent news article reporting on the appointment of provisional liquidators to various companies within the Plutus Payroll group of companies, his Honour Brereton J has delivered his judgment in respect of the winding up of those companies in addition to BRW Services Pty Limited (BRW) (collectively, the Companies).

In the matter of Plutus Payroll Pty Limited & Ors [2017] NSWSC 1360, Brereton J, on the application of the Deputy Commissioner of Taxation (DCT) ordered that each of the Companies be wound up.  Whilst the proceedings were undefended, the Court noted several issues of interest which required the Court’s careful consideration: –

1. whether a statutory presumption of insolvency is available against BRW (being a party which was joined after the filing of the DCT’s winding up application);
2. whether evidentiary certificates under the relevant taxation legislation are available in winding up proceedings i.e. whether such a proceeding is a proceeding to recover an amount of a “tax-related liability”; and
3. whether actual (as distinct from presumed) insolvency is established in respect of the Companies (save for BRW).

Background

The Companies were involved in the business of providing payroll services.  The Companies are currently the subject of one of Australia’s largest tax fraud investigations.

The DCT applied for orders under sections 459P and 461 of the Corporations Act 2001 Cth) (Act) for the winding up of the Companies on the grounds of insolvency and on just and equitable grounds, also seeking an order pursuant to section 472 of the Act for the appointment of provisional liquidators to the Companies.

Provisional liquidators, Messrs Norman, Algeri and Senatore, were appointed to each of the Companies (save for BRW who was not a party to the proceedings at the time) on 9 June 2017.  The balance of the DCT’s application i.e. the winding up of the Companies was subsequently adjourned to 26 September 2017.

Statutory presumption of insolvency against BRW

Following the joinder of BRW to the proceedings, the DCT served on BRW a creditor’s statutory demand for payment of a debt.  The demand expired unsatisfied and the DCT sought to rely on the presumption of insolvency contained in section 459C(2)(a) of the Act.

The issue before the Court was whether the presumption of insolvency can be invoked in winding up proceedings which have been commenced before the presumption arises.

Section 459C(2)(a) of the Act provides that:

The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made… the company failed (as defined by section 459F) to comply with a statutory demand.

In determining the meaning of section 459C(2)(a), the Court had regard to the reasoning of McMurdo J in Equititrust Limited v Willaire Pty Limited [2012] QSC 206, where his Honour opined at [83] (our emphasis added): –

Within paragraphs (a) through (f) [of section 459C(2)], several events are described as giving rise to the presumption.  Those paragraphs are preceded within the subsection by the words which require the court to presume the insolvency of the company if the relevant event occurred “during or after the 3 months ending on the day when the application was made“.  On the face of this provision, that same qualification as to timing of the event applies to each of the events specified within paragraphs (a) through (f).  The event must occur during the three months ending on the day when the application is made or after that period.  The words “or after“ would seem to unambiguously permit an applicant to rely upon an event although it occurs after the application is made.  In at least four decisions, it has been said that an applicant may rely upon a failure to comply with a statutory demand which postdated the commencement of the winding up proceedings.

Having regard this reasoning, Brereton J considered that where proceedings are commenced invoking grounds other than the presumption of insolvency arising from a failure to comply with a statutory demand and there is a subsequent failure to comply with a statutory demand before the hearing, the presumption becomes available.

In the absence of any argument or evidence to rebut the statutory demand, the Court was required to presume that BRW was insolvent.

Debts owed to the Commonwealth

 The failure of the Companies to pay tax debts said to be due to the Commonwealth was the basis of the DCT’s submission that the Companies’ actual insolvency should be inferred.

To establish the debts, the DCT relied upon section 350-10(1), item 2 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) which provides that a notice of assessment is conclusive evidence that the assessment to which the notice relates was properly made and the amounts and particulars are correct.

Secondly, the DCT relied on section 255-45(1) in Schedule 1 to the TAA which provides that a certificate stating one or more of the matters covered by section 255-45(2) and signed by the Commissioner is prima facie evidence of the matters “in a proceeding to recover an amount of a tax-related liability”.  The matters covered under section 255-45(2) include that notice of assessment was, or is taken to have been, served on the person under taxation law, and that sum specified in the certificate is, as at the date specified in the certificate, a debt due and payable by a person to the Commonwealth.

In considering whether the evidentiary certificates where sufficient for the purpose of these proceedings, the Court had regard to Bluehaven Transport Pty Limited v DCT [2000] QSC 268 where Williams J opined at [20] (our emphasis added): –

In my view the term “recover” in s 209 [of the Income Tax Administration Act 1997 (Cth)] should be given the wide meaning ascribed to it in the authorities to which I have referred. It is not limited, as contended for by counsel for the applicant, to some recovery process consequent upon a judgment having been obtained.  In other words, the Commissioner does not have to sue the taxpayer to judgment before he can “recover” the unpaid tax. The power to “recover” unpaid tax entitles the Commissioner to obtain satisfaction of the debt through any available legal proceedings.  Payment consequent upon winding up proceedings is obtaining satisfaction in a permissible legal manner.

Whilst the above decision was in the context of the issuance of a statutory demand, Brereton J was of the view that a winding up proceeding founded on a tax liability is a proceeding to recover an amount of a “tax-related liability” for the purposes of the TAA and therefore, the evidentiary certificates were sufficient for the purposes of these proceedings.

Actual insolvency

Brereton J noted that notwithstanding that the inquiry into insolvency ultimately depends on a company’s position on an overall basis, failure to pay a particular debt which is not the subject of genuine dispute may itself provide evidence of insolvency.

In this case, the debts which were claimed by the DCT were substantial and they were not open to any serious challenge by any of the Companies.  In circumstances where the debts had been outstanding since at least April 2017 (being the date of an amended assessment for GST payable in the period 1 July 2015  to 31 December 2016), the failure to pay the debts whilst not disputed, provided a firm foundation for an inference that the Companies could not pay their debts from any source available to them.

The Court noted the other indicia of insolvency present, namely, that the Companies had outstanding unpaid employee entitlements or unpaid payroll tax liabilities to the Commissioner of State Revenue. Accordingly, the Court was satisfied that the Companies were each unable to pay their debts as and when they fell due, and accordingly were insolvent and ought to be wound up.

Take away points

Whilst these winding up proceedings were undefended, the decision considered some key issues in respect to the presumption of insolvency and the relationship between the TAA and winding up proceedings.

The fact that creditors can also rely on the presumption of insolvency under 495C(2)(c), in addition to the other grounds of insolvency, is a useful tool for creditors in circumstances where a statutory demand has expired unsatisfied following to the commencement of the winding up proceedings.

Additionally, in winding up proceedings involving the DCT, the DCT is entitled to rely on evidentiary certificates issued pursuant to the TAA in order to establish the existence of an outstanding debt payable by the debtor company.

Separately, in respect of section 459T of the Act, the Court noted that whilst it provides that two or more companies may be wound up in insolvency on the one application if they are “joint debtors”, there is no reason why a single application cannot be made in respect of multiple defendant companies where the requirements of rule 6.19 of the Uniform Civil Procedure Rules 2005 (NSW) for joinder of defendants are satisfied.

This is a potentially big cost benefit for creditors seeking to wind up a number of companies where rule 6.19 is satisfied.

Please contact us for more information.