In brief: A recent Federal Court decision granting an adjournment of a winding up application may indicate an increasing willingness by the courts to take into account the impact of a tax appeal on the ultimate financial viability of a company, even if it is insolvent. Partner Michael Quinlan ( view CV) and Law Graduate Arlou Arteta report.
How does it affect you?
- In Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Limited1 it was found that the fact a taxation decision might be under review or appeal does not mean that a tax debt is not payable;
- Normally, in assessing whether a company is insolvent (ie whether it is unable to pay all of its debts as and when they fall due, and in winding up proceedings based on insolvency), the fact that the taxpayer may be appealing the Deputy Commissioner of Taxation's decision to impose the tax is not a relevant consideration.
- In this case, the Federal Court was, in granting an application to adjourn a winding up application, willing to take into account the fact that there were proceedings on foot to challenge the tax assessment, as there were unusual circumstances – the company had not been trading for a number of years and had no assets.
On 1 April 2011, the plaintiff, the Deputy Commissioner of Taxation (the Deputy Commissioner), issued a statutory demand on the defendant, Bayconnection Property Developments Pty Ltd (Bayconnection), for the amount of $145,922 relating to a debt from a running balance account.
Bayconnection failed to comply with the statutory demand and, on 4 November 2011, the Deputy Commissioner lodged an application to wind it up on the grounds of insolvency, under section 459P of the Corporations Act 2001 (Cth).
Bayconnection sought to adjourn the application, due to pending Part IVC proceedings under the Taxation Administration Act 1953 (Cth) (the Administration Act) in the Administrative Appeals Tribunal. Bayconnection alleged that its insolvency was solely due to its tax debt, which was subject to appeal, the outcome of which could not be determined in the Federal Court proceeding before Justice Robertson. Further, Bayconnection submitted that if the application were adjourned, the court may order that the six month period to which an application to be wound up in insolvency is to be determined, should be extended under s459R(2) of the Corporations Act because special circumstances applied.
Justice Robertson noted that the main issue was whether the court should exercise discretion under s459A of the Corporations Act by which 'on an application under section 459P, the Court may order that an insolvent company be wound up in insolvency'.
Should the court exercise its discretion?
Justice Robertson highlighted that an important consideration in determining whether the court should exercise its discretion under s459A of the Corporations Act was found in s14ZZM of the Administration Act, which provides:
"The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending."
In the present case, his Honour noted that the court may exercise its discretion, however, there are some circumstances where the court should adjourn proceedings when there are pending Part IVC proceedings under the Administration Act:
- where the collection of the tax debt is not prejudiced or if there was prejudice it was insubstantial;
- where the debtor company has a reasonably arguable case; and
- those proceedings are soon to be heard.
His Honour found that the circumstances applied in the present case, because there would be no prejudice in recovering the tax debt. This was because Bayconnection had not been trading for six years and had no assets. Further, his Honour found that Bayconnection had a reasonably arguable case in the Part IVC proceedings under the Administration Act, as it had been involved in a real enterprise and did not make any sales or claim any credits in the six years it had not been trading. The finding that Bayconnection had a reasonably arguable case was determinative in making an order to adjourn proceedings.
Adjournment of proceedings
Section 459R of the Corporations Act provides:
- An application for a company to be wound up in insolvency is to be determined within 6 months after it is made.
- The Court may by order extend the period within which an
application must be determined, but only if:
- the Court is satisfied that special circumstances justify the extension; and
- the order is made within that period as prescribed by subsection (1), or as last extended under this subsection, as the case requires.
- An application is, because of this subsection, dismissed if it is not determined as required by this section.
- An order under subsection (2) may be made subject to conditions.
His Honour considered that special circumstances applied to allow an extension of the period. His Honour found that because Bayconnection was not trading, and had not been trading for six years; had no assets; and had no other third-party creditors, except for the Deputy Commissioner, that this encompassed special circumstances under s459R(2)(a). Additionally, his Honour stated that it was unlikely Bayconnection would have been engaging in insolvent trading or that evidence before the court would become 'stale'. Therefore, his Honour extended the period within which the application must be determined.
His Honour allowed the adjournment, due to the 'unusual circumstances of the case', and imposed a condition that Bayconnection ensure the Part IVC proceedings under the Administration Act be heard as soon as practicable.
This case is significant, as it is the first time that the Federal Court has, due to pending Part IVC proceedings in the Administrative Appeals Tribunal, granted an adjournment of a winding up application. This is particularly remarkable because Bayconnection, by failing to comply with the statutory demand, would usually be presumed to be insolvent; further, the facts presented in the case did not prove that Bayconnection was in fact, solvent. This may demonstrate the courts' greater willingness to take into account the real impact of a tax appeal on the ultimate financial viability of a company, even if it is deemed to be insolvent.
1 FCA 363.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.