Written by Robert Kite in September, 2009

Readers will recall from my previous article “Are All Animals Created Equally”, I discussed the benefit enjoyed by the Australian Taxation Office (“ATO”) in relation to notices issued under Section 260-5 of the Taxation Administration Act (“TAA”).

In essence, this section allowed for the ATO issue a notice to a debtor of an entity who was behind on their remittances (which I shall refer to as the insolvent entity) to the ATO which effectively serves as a garnishee notice.  The serving of this notice required the debtor to pay any amounts due and payable to the insolvent entity, to the ATO after having received any such notice in a reduction of the debt to the ATO.

The debate of whether the ATO should continue to enjoy such benefits post the Liquidation of a company has received much Court time of late, and the matter has now appears to have been resolved by the High Court.

Before we discuss what the decision was, we need to consider the context of the Court proceedings.

The matter before the High Court was Bruton Holdings Pty Limited (In Liquidation) v Commissioner of Taxation {2009} HCA 32.

The history of the matter (very briefly) is that a Firm of solicitors (“the Solicitors”) were holding a significant level of funds (approximately $450,000) in their trust account for Bruton (in its capacity as Trustee of a Trust).  The ATO contended that the funds in the Solicitors Trust Account represented a debtor, for which the ATO sought to recover the funds after having issued a notice under section 260-5 of the TAA. The notice was issued to the Solicitors after Bruton had been placed into Liquidation.

This matter was first considered by the Federal Court, in which the Liquidator sought orders that the notice be declared void, for which the Liquidator was successful.

The ATO sought to appeal the Orders referred to above, for which they were successful.

The appeal of the ATO ultimately led to the matter being considered before the High Court.

Whilst there were many issues raised in the preceding matters before the Federal Court, the issue before the High Court placed a focus on a number of sections of the Corporations Act, including sections 501 and 555. Readers will recall from my previous article in which I referred to the concept of a fair and equal distribution of assets to all Creditors.  The following are but two of the sections in the Corporations Act which assist in providing for same.

Section 501 of the Corporations Act provides that:-

“Subject to the provisions of this Act as to preferential payments, the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company’s constitution provides, be distributed among the members according to their rights and interests in the company.”

Section 555 of the Corporations Act provides that:-

“Except as otherwise provided by this Act, all debts and claims provided in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.”

As can be seen from the readings of Sections 501 and 555, if the ATO were able to recoup the funds in the Solicitors Trust Account, it certainly would not have resulted in the claims of creditors being paid proportionately, as the ATO would have received the benefit of the entirety of the funds.

In addition to the above, the High Court also considered Sections 500(1) and (2) of the Corporations Act which provide:-

(1)        “Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void”

(2)        “After the passing of the resolution for voluntary winding up, no action or other civil proceedings is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.”

In considering the proceedings the High Court sought to establish if the notice issued under Section 260-5 was “attachment” and therefore, rendered it void per Section 500(1) above.

The High Court held that the notice was considered an attachment in accordance with Section 500(1) of the Corporations Act and was void, therefore overturning the appeal of the Federal Court which was previously determined in favour of the ATO.  When the High Court handed down its decision, they found in favour of Bruton 5 – 0.

In light of the above, the advantage (which was previously) afforded to the ATO in relation to Section 260-5 notices issued under the Taxation Administration Act appear now to have been lost when it comes to company’s which have been placed into Liquidation.

It is worthy to note that the decision of the High Court was handed down within a week of the previous issue of “On the Beam” having been printed and dispatched to our valued readers.