The Commissioner of Taxation (CoT) lost its priority status in liquidations in 1993, when it gained the right to issue Director Penalty Notices. The CoT’s also have the power to issue notices to parties that owe a taxpayer money directing the payment of that money to the CoT.
These notices were not commonly used in the past and rarely used once a corporate taxpayer went into liquidation. But the CoT did issue such a notice after the liquidation of a company had already commenced.
That notice was challenged and the matter proceeded to the Court of Appeal in the Federal Court.
The case of Burton Holdings Pty Ltd was decided in December 2008.
The essence of the case is determining the right of the CoT to issue a section 260-5 Notice after a company enters into a voluntary winding up.
A section 260-5 notice is really a garnishee order. It is served by the CoT on parties that owe the company money. This group includes not only trade and loan debtors and bankers, but any party that has a judgment against them in favor of the taxpayer company. The first implication is that monies due to the company can now be obtained by the CoT outside the priority provisions in the Corporations Act.
Historically it was widely assumed that the CoT would not issue a section 260-5 Notice after the liquidation of the company commenced, even though some parties thought it theoretically allowable. It was assumed that enforcing such a notice would be stopped by section 500 of the Corporations Act voiding any “attachment, sequestration, distress or execution” against the property of the company. The Full Court of the Federal Court disagrees, and this is where the situation stands at the moment.
The wider implication is that liquidators often obtain judgments against directors for insolvent trading, or creditors and other parties for preferences and other void transactions. Whilst the actions must be taken by the liquidator, the judgments are in the name of the company and direct the money to be paid to the company. It is possible that these judgments debts can be caught under 260-5 notices.
This may have significant implications to a liquidator that has spent significant time and money proving a void transaction or insolvent trading claim against a party, only to lose the recovery of that money to the CoT through the issuance of a piece of paper. While it may be argued that the liquidator and the legal team should be paid from the proceeds under a ‘fruits of their labor’ argument – we are not aware that this has ever been tested – the creditors will surely lose any dividend from any of these monies.
We understand that the liquidator will be seeking special leave to appeal to the High Court. [Burton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation [2008] FCAFC 184]
This article from Worrells