A recent decision by the Full Federal Court in Clifton (liq) v Kerry J Investment Pty Ltd trading as Clenergy  FCAFC 5 (Clifton), provides guidance on the discovery obligations placed on liquidators when pursuing unfair preference claims, and the relationship between payment plans and a company’s debt to the ATO.
What is an unfair preference claim?
An unfair preference is a payment or transfer of assets which provide a creditor, or creditors, with an advantage over other creditors. Liquidators appointed to the administration of assets can recover such unfair preferences in order to distribute the assets or funds equally amongst the creditors.
An unfair preference can only occur within the context of an insolvent transaction involving an unsecured debt.
What is a payment plan?
A payment arrangement with the ATO is administered under s 255-15 of the Taxation Administration Act 1953 (Cth). It allows a company to pay certain agreed tax debts by instalments over a period of time. These debts may include GST, PAYG or FBT liabilities. However, despite the payment arrangement, the tax debt remains “due and payable”. Unlike a commercial agreement, it is not open to the company, in assessing its solvency, to treat the tax debt as being deferred.
In Clifton, the liquidators of the company, Solar Shop Australia Pty Limited (Solar), commenced unfair preference claims against Kerry J Investment Pty Ltd trading as Clenergy, Wuxi Suntech Power Co Limited and SMA Solar Technology AG (collectively the respondents).
A preliminary trial held that Solar became insolvent by 31 July 2011. The liquidators appealed this finding, claiming that Solar was insolvent earlier, by 31 January 2011 or in the alternatives, by 30 April 2011 or 22 May 2011. The Full Court of the Federal Court queried the trial judge’s assessment of Solar’s insolvency on 31 July 2011, in relation to other debts, given the inadequacy of the discovery of documents relevant to the litigation.
The question of discovery
The respondents’ argued on appeal that the liquidators’ failed to discover approximately 1,000 documents at first instance. In countering this claim, the liquidators’ argued that:
- The discovery documents were unorganised, deteriorated and difficult to locate.
- The liquidators were unable to access Solar’s full email record which was stored in a cloud-based server and, further, had no reason to believe that those emails contained any information pertinent to the issue of insolvency.
- The discovery failure was minor and did not affect the relief sought by the respondents.
The Full Court of the Federal Court rejected these arguments. The liquidators failed to show that they undertook a “reasonable” search of the documents within their control and of which they were aware. As a result, the liquidators’ appeal was dismissed.
The payment plan and ATO debt
Between 14 January 2011 and 30 June 2011, Solar entered into several payment plans with the Australian Taxation Office (ATO). The respondents argued on appeal that these payment plans meant that Solar’s debt to the ATO was not due and payable and hence was not relevant to any finding of insolvency.
Solar had GST, PAYG and FBT liabilities to the ATO. Solar’s inability to pay these liabilities in full meant that the company received several legal “warnings”. As a result, the ATO entered into a payment agreement with Solar whereby the company could pay their liabilities in instalments. The liquidators were successful in establishing that these payment arrangements were made under s 255-15 of the Taxation Administration Act 1953 (Cth), but that such arrangements did not vary the time at which Solar’s liabilities to the ATO were due and payable.
In reaching this conclusion, the Full Federal Court concluded that although both s 255-10 and 255-20 of the Taxation Administration Act 1953 (Cth) expressly grant the Commissioner of Taxation the discretion to defer the date on which payment becomes due, there was no reason to suggest that the instalment arrangement put in place under s 255-15 be interpreted as a deferral. The law of deferred payments is clear and is supported by the authorities in Hall v Poolman  NSWSC 1330 and Smith v Bone  FCA 319.
The payment arrangements did also not constitute any waiver by the Commissioner of Taxation of Solar’s obligation to pay their tax debts.
The Clifton decision provides guidance to legal practitioners, liquidators and administrators in practice. Specifically:
1. Discovery obligations and unfair preference claims — Substantial failure by a liquidator to comply with his or her discovery obligations may result in dismissal of an otherwise valid unfair preference claim. Liquidators have an obligation to make “reasonable” efforts to locate all pertinent documents related to the liquidation process.
2. Payment arrangements with the ATO — A company’s debt to the Australian Commissioner of Taxation remains due and payable despite the existence of a payment agreement under s 225-15 of the Taxation Administration Act 1953 (Cth).
Sources and further reading
A warning and opportunity for liquidators pursuing unfair preference claims, Aathreya P & Romanin J, Johnson Winter & Slattery, March 2020.
A deferred tax debt can remain due and payable, Murray M, Murray’s Legal, 8 February 2020.
You can access the full judgment for Clifton (liq) v Kerry J Investment Pty Ltd trading as Clenergy  FCAFC 5 here.
You can read more about the nature of unfair preference claims in our Bankruptcy & Insolvency commentary.
You can read more about the deferral of payments in our Income Taxation commentary.