The decision of the Full Court of the Federal Court of Australia in the matter of The Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184 has the potential to turn the existing body of law in respect to post liquidation priorities on its head. By allowing the Commissioner of Taxation (the Commissioner) a priority for tax debts arising out of notices issued after the commencement of a creditor's voluntary liquidation, the Court has brought into question the statutory priorities mechanism which has been in place since 1993.

Background

Bruton Holdings Pty Ltd (Bruton) was placed into creditors voluntary liquidation with a tax debt in excess of A$7 million.

After being placed in liquidation, the Commissioner served notices for payment pursuant to s260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the Notices) for the recovery of money owing by third party creditors to Bruton.

Under the Taxation Administration Act, upon the Notices being served, a charge arises rendering the Commissioner a secured creditor (the Commissioner's Charge).

Bruton applied to the Federal Court of Australia seeking (among other things) declarations that the Notices issued by the Commissioner were 'void and unenforceable'.

Historically such notices have been found to be 'attachments' and deemed invalid if served after the commencement of a creditor's voluntary liquidation by virtue of s500(1) of the Corporations Act (2001) (Cth) (the Act) which provides that:

"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."

At first instance, Justice Allsop found in favour of Bruton, declaring that the Notices were void. His Honour noted, among other things, that to find otherwise would be contrary to the current system of priorities which are part of "orderly winding up" and result in the reinstatement of the Commissioner's priority for tax debts (which was removed back in the early nineties).

The appeal

The Commissioner successfully appealed the decision and the Court found that the Notices were not 'attachments' for the purposes of s500 of the Act, and therefore, valid.

In finding that the Notices were valid, the Court refrained from expressing a concluded view as to the effect of the decision on post liquidation priorities. However, the Court did note that it may be at least arguable thatthe priorities set out in the Act override any later charge created by such a notice from the Commissioner.

However, absent further judicial review or clarification, the decision poses a number of questions in respect to the pool of funds available for post liquidation distribution where the Commissioner decides to issue s260-5 notices. The decision also raises a number of practical questions for creditors and insolvency practitioners including:

  • given that the Commissioner can issue notices post liquidation, can there be any certainty as to what assets are available for distribution?
  • how can an insolvency practitioner provide an informed estimate as to the potential dividend to be paid out of the liquidation?
  • will the Commissioner's Charge take priority over the fees and remuneration of the insolvency practitioner?
  • how will a creditor know whether creditors voluntary liquidation is an appropriate route to obtain a reasonable return from a distressed company (as opposed to a deed of company arrangement if one is proposed)?
  • does the Commissioner's Charge take priority over other secured creditors?

It remains to be seen whether the Commissioner's Charge will be afforded the equivalent priority under voluntary administration. Whilst we consider it likely that the issue of such a notice will be considered an 'enforcement process' against property as envisaged by s440F of the Act, the same was previously said about attachments under s500 of the Act before the Bruton decision.

It is plainly evident that the Bruton decision has the potential to shake the system of post liquidation priorities to its core. It is expected that the Bruton decision will be the subject of an appeal. In the meantime, unsecured creditors, banks and insolvency practitioners alike will need to reconsider their position and seek advice in the event the Commissioner intervenes with a post liquidation s260-5 notice.

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