ATO on the watch after liquidators claw back funds despite a Deed of Company Arrangement

In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed)(in liq) [2021] NSWSC 232, Deed Administrators who were subsequently appointed Liquidators of Western Port Holdings Pty Ltd (the Company) clawed back over $2 million worth of payments made to the Australian Taxation Office (ATO) whilst the Company was subject to a Deed of Company Arrangement (DOCA). Despite payments to the ATO being made at the encouragement – and some may say under pressure – of the Deed Administrators (Administrators), the Court considered that the payments (including those received from third parties) were not made “under authority” of the Administrators and were taken to be “received from” the Company.

What happened?

The Company ran a family business providing traffic management services. Operated by a father and his three sons, the Company regularly borrowed and extended loans between family members and their related companies.

When the Company entered voluntary administration in April 2015, it owed 68 creditors (collectively, $1.855 million) and $2.6 million to the ATO. The Company also employed 160 staff and owed employee benefits and entitlements.

In recommending the DOCA to creditors, the Administrators estimated a return to unsecured creditors of between 5 to 8 cents in the dollar compared to no return if the Company was placed in liquidation. The ATO was the only creditor to vote against the DOCA and the Administrators used their casting vote and voted in favour of the DOCA which provided for (a) control and management of the Company to revert to the director and (b) obliged the director to cause the Company to comply with its tax obligations.

Between May 2015 and January 2017, 37 payments (including 11 payments made by third parties) totalling close to $2 million were made to the ATO. By the time creditors had resolved to terminate the DOCA in May 2017, the Administrators had issued six default notices under the DOCA and the Company had entered into four payment arrangements with the ATO.

The Liquidators estimated that if they were successful against the ATO, priority creditors would receive between 61 to 100 cents in the dollar and unsecured creditors (including the ATO) would receive 4 cents in the dollar. In contrast, if the ATO was successful in retaining the disputed payments, it would have received 31 cents in the dollar with nil return to all other creditors.

The Court was tasked with determining if:

• Payments made by third parties were considered to be “received from” the Company having regard to section 588FA(1)(b) of the Corporations Act 2001 (the Act) and the decision of Cant v Mad Brothers Earthmoving[1] (refer to our previous article here); and
• Payments made by the Company and by third parties were made “under authority” of the Administrators having regarding to section 588FE(2B)(d)(i) of the Act and the decision of Commissioner of Taxation v Yeo as Liquidator of Ready Kit Cabinets (in liq)[2] (refer to our previous article here).

“Received from the Company” and “Diminished Value”

Third party payments were made by one of the directors, related entities and Hermes Capital Australia Pty Ltd. The ATO submitted that payments not made directly by the Company were not “received from” the Company. Meanwhile the Liquidators submitted in effect, that a third party payment authorised by the Company could be “received from” it, if it could be established that the payment was made “by or on behalf of” the Company.

Whilst the Court observed with disquiet that the language of the Act did not go so far as to require that a third party payment resulted in a diminution in assets of the Company as reasoned in the Cant decision, the Court felt it was not entitled to depart from that decision.

Based on the facts of this case and adopting the reasoning in the Cant decision, the Court found the third party payments were unfair preferences “received from” the Company resulting in the diminution of the Company’s assets as they involved:

• Reduction of debts/receivables owed to the Company by those third parties;
• Increased indebtedness to other third parties that had made payments for the Company; and
• Reduced assets where those assets are used to secure funding from third parties to pay the Company’s debts.

“Under authority” of Administrator

Where an administrator authorises a transaction of a company that is subject to a DOCA, the transaction will not be voidable under the Act.

The ATO sought to distinguish this matter from the Ready Kit Cabinets decision by submitting that the Administrators took an active role in pressing for the director and the Company to make payment of outstanding tax liabilities.

The Administrators issued five default notices relating to the Company’s tax obligations and had even called a meeting in August 2016 for creditors to vote on whether the DOCA should be terminated as a result of the Company’s continued breach of tax obligations.

On the significant amount of evidence tendered by the Liquidators, the Court found the facts of this case were not unlike those in the Ready Kit Cabinets decision: that the Administrators did not specifically instruct anyone to make the payments and did not know about the payments until after they had been made even though they were aware of ongoing discussions between the Company and the ATO.

In the absence of contrary evidence, the Court found that the DOCA terms:

• Returned daily management of the Company to the control of the director who was taken to have authorised payments to the ATO. The Administrators pressing for compliance with tax obligations (a core requirement under the DOCA) did not constitute authorisation of payments made to the ATO; and
• Did not have the effect of payments being authorised by the Administrators where there was a power of attorney clause in the event of default and where they also had power to authorise operation of a Company account (which was not exercised).

As a result, the Court concluded that all third party payments were voidable.

Key takeaway

The “doctrine of ultimate effect” continues to be applied to unfair preference cases although there are some differences in decisions considering whether third party payments are taken to be “received from” a company and disquiet expressed in this case about following the recent Cant decision.

This case confirms the Ready Kits Cabinet decision that payments made without the administrator’s authority whilst a company is subject to a DOCA can be clawed back even if the administrator was aware of the Company’s dealings with the ATO and took steps to ensure payment of tax liabilities as required under the DOCA.

Liquidators and administrators can take some comfort from this decision whilst the ATO and other creditors will need to be cautious about payments accepted from a company subject to a DOCA.

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Authored by: 

Barbara-Ann Sim, Partner
Taylor Green, Solicitor

[1] Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198.

[2] Commissioner of Taxation v Yeo as Liquidator of Ready Kit Cabinets Pty Ltd (in liq) [2020] FCAFC 199 upholding the decision at first instance.