In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) [2021] NSWSC 232 (Western Port Holdings):

A transaction while a company is under a deed of company arrangement can be a voidable preference under section 588FE(2B).

The ATO has in recent times defended claims for preference payments made to the ATO by a company while under a deed of company arrangements (DOCA) with a novel argument along the following lines:

  • Section 588FE(2B)(d)(i) provides that payments made “by, or under the authority of the administrator of the deed” are not voidable
  • The DOCA requires the company to comply with its tax obligations
  • The deed administrators have the power to access the company’s books and monitor compliance with its obligations under the DOCA
  • The deed administrators have the ability to terminate the DOCA and assume control over the company if there is a breach of the DOCA’s terms
  • Ergo, the preference payments made by the company while under a DOCA were made “on behalf of the company by, or under the authority of” the deed administrator.

The Full Court of the Federal Court rejected the above argument in Commissioner of Taxation v Yeo as Liquidator of Ready Kit Cabinets Pty Ltd (in liq) [2020] FCAFC 19 (Ready Kit) (they also lost at first instance).

The Full Court held that because managerial control reverted to the company’s directors under the DOCA, the payments were made under the directors’ authority, not the deed administrators.

The facts were relevantly different in Western Port, the ATO argued. In Ready Kit, the deed administrators did not know about the payments until after they were made.

In Western Port Holdings, the deed administrators sought details and were informed about the company’s compliance with tax liabilities, regularly followed up with the company and the ATO in respect of unpaid amounts, sought confirmation that the tax liabilities were being paid, and issued five notices of default requiring the company to rectify its breaches of the DOCA and make payment of its outstanding tax liabilities.

Rees J did not consider this difference helped the ATO in Western Port:

“160. There is no doubt that Mr Ross and his staff pressed the company to meet its statutory liabilities. The ATO was the biggest unsecured creditor of the company. Compliance with the company’s obligation to meet its statutory obligations was a core obligation of the Director under the DOCA. It is apparent that Mr Ross saw the company’s inability to meet this obligation as a key indicator of whether and when the DOCA should be terminated. But that does not mean that the payments ultimately made by the company to the ATO were made under Mr Ross’ authority as opposed to the Director’s authority, to whom control and management of the company had to be re-vested by the DOCA.”

 

Unless the ATO can successfully appeal this decision, this may be the final nail in the coffin for the ATO’s argument.

 

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