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FEDERAL COURT OF AUSTRALIA

Wanted World Wide (Australia) Ltd v Federal Commissioner of Taxation

[2004] FCA 1063

Lander J

19 August 2004 - Adelaide

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Lander J.    The plaintiffs are the liquidators of Wanted World Wide (Australia) Ltd (the company) which is a company incorporated on 16 September 1998 in the State of South Australia pursuant to the Corporations Act 2001 (Cth).

  2  The plaintiffs were appointed joint and several administrators of the company pursuant to s 436A of the Corporations Act 2001 (Cth) on 15 September 2003.

  3  On 11 November 2003, the company's creditors resolved to wind up the company pursuant to s 439C of the Corporations Act 2001 (Cth) and the plaintiffs were appointed joint and several liquidators.

  4  For the purposes of the Corporations Act 2001 (Cth), the day on which the administration began is the s 513C day and, in this case, is, of course, 15 September 2003 (the relation-back day).

  5  The winding up is taken to have commenced on that day (s 513C).

  6  On 20 April 2004, the plaintiffs brought these proceedings against the defendant seeking orders that:

 (1)  the defendant be directed to pay to the company an amount equal to the preferences in the sum of $220,852 pursuant to the provisions of s 588FF(1) of the Corporations Act 2001 (Cth);

 (2)  judgment in the same amount;

 (3)  interest; and

 (4)  costs.

  7  The plaintiffs claim that during the 6 months prior to the relation-back day (that is, between 15 March 2003 and 15 September 2003) the company made 10 payments to the defendant totalling $220,852 which were voidable transactions (s 588FE) because they amounted to unfair preferences (s 588FA).

  8  The transactions showing the cheque number, the date the cheque was drawn, the date it was presented and the amount for which it was drawn were:

Cheque number	Date drawn	Date presented	Amount $
4357	8 May 2003	13 May 2003	4,000.00
4368	12 May 2003	15 May 2003	35,368.00
4437	23 May 2003	23 May 2003	21,600.00
4440	23 May 2003	23 May 2003	20,000.00
4522	6 June 2003	6 June 2003	4,000.00
4634	23 June 2003	23 July 2003	41,984.00
4686	8 July 2003	8 July 2003	4,000.00
4791	28 July 2003	28 July 2003	39,128.00
4849	8 August 2003	11 August 2003	15,000.00
4929	22 August 2003	25 August 2003	35,772.00
			$220,852.00

  9  Each of the transactions referred to above was a transaction within the definition of "transaction" in s 9 of the Corporations Act 2001 (Cth).

  10  The plaintiffs claim that each transaction is an unfair preference given by the company to the defendant. In each case, the plaintiffs' claim is that, before each transaction was entered into, the defendant was an unsecured creditor of the company and the company and the defendant were parties to each transaction, and each transaction resulted in the defendant receiving from the company, in respect of an unsecured debt the company owed to the defendant, more than the defendant would receive from the company in respect of the debt if the transaction was set aside and the defendant was to prove for the debt in a winding up of the company (s 588FA).

  11  It is the plaintiffs' case that each of the transactions is an insolvent transaction within the meaning of s 588FC of the Corporations Act 2001 (Cth) because each transaction was an unfair preference and, at the time when each transaction was entered into, the company was insolvent or the company became insolvent because of entering into the transactions.

  12  The plaintiffs claim that each transaction referred to is voidable under s 588FE of the Corporations Act 2001 (Cth) because each transaction was an insolvent transaction and the defendant was a party to each transaction, and each transaction was entered into during the 6 months ending on the relation-back day.

  13  The defendant did not file a defence. Indeed, the defendant did not file an appearance but, because the plaintiffs did not object, I allowed counsel to appear for the defendant on an undertaking that an appearance would be filed.

  14  I was told that the defendant did not dispute that the company made each of the payments referred to at [7] and [8] hereof in the manner described and for the amount as shown.

  15  I was told that it was not disputed by the defendant that it received, in total, the sum of $220,852 in respect of the transactions pleaded and during the period pleaded.

  16  The defendant's counsel indicated that he did not oppose the making of the orders sought. I invited him to consent to the orders. However, he directed my attention to the decision of Finkelstein J in Crosbie v FCT (2003) 130 FCR 275; 53 ATR 663. In that case, the Commissioner of Taxation was defendant to a claim under s 588FF of the Corporations Act 2001 (Cth) in respect of unfair preferences under s 588FA of the Corporations Act 2001 (Cth) and brought a cross-claim against the directors of the company seeking an indemnity under ss 588FGA and 588FGB of the Corporations Act 2001 (Cth). Section 588FGA creates a statutory indemnity in favour of the Commissioner of Taxation if an order has been made against the Commissioner under s 588FF.

  17  Section 588FF relevantly provides:

   

588FF(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

    [There follows 10 different types of orders that may be made.]

  18  Section 588FF applies to any proceedings against any party, including the Commissioner of Taxation, where the liquidator has established a voidable transaction.

  19  In Crosbie, the Commissioner indicated that he would not contest the plaintiff's claim and would submit to an order under s 588FF. The effect of such an order was to give the Commissioner the statutory indemnity under s 588FGA. A question arose whether the Commissioner could consent to an order. Finkelstein J said (at FCR 276-277 [2]; ATR 664 [2]):

   

The condition which must be satisfied for s 588FGA to operate is that the court has made an order against the Commissioner under s 588FF. The court can only make an order under that section if it "is satisfied that a transaction of the company is voidable" under s 588FE. Two New South Wales cases, Cadima Express v DCT (1999) 43 ATR 604; 157 FLR 424, a decision of Austin J, and SJP Formwork (Aust) Pty Ltd (In Liq) v DCT (2000) 34 ACSR 604, a decision of Santow J, stand as authority for the proposition that this condition can be satisfied by a consent judgment; that is, a judgment which the court enters without an examination of the facts. With regret, I am unable to agree. A court cannot be "satisfied" that a transaction is a voidable transaction unless it has before it the facts which will establish that conclusion. Indeed, on one view the "satisfaction" that is required by s 588FE is akin to a "jurisdictional fact" the existence of which must be determined before the court can exercise its power to avoid a transaction: Parisienne Basket Shoes Pty Ltd v Whyte (1938) 59 CLR 369 at 390-392; Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611 at 650-651.

  20  His Honour then referred to 2 cases in which a statute required a court to be "satisfied" of a particular matter, which he said showed that evidence needed to be led before a court could be "satisfied" of a matter.

  21  With respect to his Honour, neither of the cases he relies upon supports a conclusion that a court cannot be "satisfied" when the parties before the court agree upon a verdict or order. The first, Hobart v Medical Board of Victoria [1966] VR 292, was an appeal from a decision of the Medical Board of Victoria. The board, on an inquiry into infamous conduct, needed to be "satisfied" that the practitioner was guilty of that conduct. On appeal, Hudson J said (at 296):

   

Another submission that was made on behalf of the appellant was that the burden of proof which rests upon the board in a case, such as the present, is the criminal onus-which requires that the charge should be proved beyond reasonable doubt. I do not accept this submission. It puts the matter more favourably to the appellant than the law allows. What s 12(1)(b) of the Act requires is that the board - and on this appeal the court - shall be "satisfied" that the person charged has been guilty of infamous conduct in a professional respect. But though the appellant's submission goes too far, it is clear that the importance and gravity of the question that is involved must enter into the consideration of whether the evidence produces the reasonable satisfaction that is required, and it is only after the exercise of caution and after making a close scrutiny of the evidence that the degree of satisfaction required can be reached: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 368; [1938] ALR 334, a case which has been followed and applied on a number of occasions in Australian courts, and in which the words of the statute describing the proof required were the same as in the present case.

  22  As can be seen, that case was concerned only with the standard of proof.

  23  In the second case, Ex parte Merrett (1997) 140 FLR 412, which concerned a liquidators' application for the issue of a summons under s 596B of the Corporations Act 2001 (Cth), the person to whom the summons was addressed sought a review of the registrar's decision ordering the issue of the summons.

  24  Young J summarised the issue before him (at 414):

   

Mr Whittle says that "satisfied" means that the court must, on the balance of probabilities, come to the view, on the evidence before it, that the prescribed fact has been established. The prescribed fact is that there is a prima facie case or, at least, something approaching a prima facie case that the proposed examinee is able to give the relevant information. On the other hand, Mr Ryan says that the word "may" in the phrase "may be able to give information" means that it is sufficient if the court is satisfied that the proposed examinee could possibly give information.

  25  He addressed that issue (at 415):

   

Accordingly, under s 596B, the liquidator must show to the court facts which satisfy the court that the proposed examinee may be able to give information.

  26  His Honour did not mean thereby that a court could not be satisfied on a consent order. That was not the issue.

  27  Section 596B is an example of the use of the word "satisfied" in the Corporations Act 2001 (Cth). I will refer to others shortly. Section 596B(1)(b)(ii) allows the court to summon a person for examination about a corporation's examinable affairs if the court is satisfied that the person may be able to give information about examinable affairs of the corporation. In my opinion, the court could be satisfied of that if the proposed examinee consented to the issue of the summons for his examination.

  28  There can be no doubt that in the absence of the parties' agreement on a matter in which the court must be "satisfied", the party bearing the onus of satisfying the court must adduce relevant evidence to allow the court to be satisfied. It does not follow, however, that the court can only be "satisfied" after hearing evidence. The Act may still permit the court to be satisfied if the parties agree that the court can be satisfied.

  29  If the action was against a party other than the Commissioner of Taxation and the defendant filed a defence admitting; that the company was insolvent when the transactions were made; that the transactions were unfair preferences; that the transactions were insolvent and voidable transactions, it is difficult to understand why the court would not be entitled to act on those admissions and be satisfied that an order under s 588FF should be made.

  30  There are good reasons for thinking that the proper construction of s 588FF would allow orders to be made by consent. First, it would encourage parties to settle their disputes. Secondly, it would mean that, where there is no dispute, a liquidator does not have to go to the cost of preparing an insolvency report and proving to the court that the company was insolvent when nobody disputes that fact. Insolvency reports are notoriously expensive. Thirdly, the unsecured creditors, for whom the action is brought, would be likely to recover a greater dividend (because of the avoidance of costs) and secure that dividend earlier. Fourthly, it would encourage liquidators to bring appropriate actions because they are likely to be less expensive. Fifthly, if a defendant puts the liquidator to proof when there was really no issue between the parties that defendant may be mulcted with costs. Sixthly, it is only in cases where the Commissioner is involved that a statutory indemnity arises. The special provisions relating to the Commissioner should not dictate the construction of the section generally.

  31  The construction given by Finkelstein J prevents any other party coming to an agreement with the liquidator to avoid costs.

  32  The term "satisfied" is used consistently throughout the Corporations Act 2001 (Cth). Examples are: s 206C(1)(b); s 206D(1)(b); s 206E(1)(b); s 238(2); s 274; s 420B(2); s 441H(3); s 444F(3); s 4435(1); s 447A(2); s 459J(1); s 459P(3); s 459R(2); s 459S(2); s 481(2); s 486A(2)(b); s 486A(2)(c); s 486B(1)(b); s 588K(b); s 596A(b); s 596B(1)(b); s 600A(1); s 601PC(2)(b); s 664F(4); s 983A(2); s 1318(3).

  33  If Finkelstein J's construction of s 588FF is correct, then parties would not be entitled to consent to orders, where appropriate, in any proceedings under any of those sections.

  34  The term "satisfied" means no more than that the matter which is sought to be established must be proved on the balance of probabilities (s 1332).

  35  Finkelstein J's decision was not followed in Dean-Willcocks (As Liquidator of SJP Formwork (NSW) Pty Ltd (In Liq)) v FCT (No 2) (2004) 49 ACSR 325.

  36  That also was a case under s 588FF of the Corporations Act 2001 (Cth). The plaintiffs brought proceedings against 14 defendants, one of whom was the Commissioner of Taxation. The plaintiffs sought a separate trial in respect of the claim against the Commissioner, which was granted.

  37  The plaintiffs wished to avoid the cost of obtaining an insolvency report from an expert and sought a declaration from the court that the first plaintiff "is justified in relying on certain evidence now before the court as sufficient to enable the court to be satisfied, for the purposes of the trial of the plaintiffs' claim against the Commissioner of Taxation (the Commissioner), that at the relevant time SJP was insolvent. The evidence consists of [the first plaintiff's] affidavits made on 26 March and 5 November 2003 and a letter to his solicitors from the Australian Taxation Office dated 19 September 2003".

  38  That letter was in the following terms:

   

I advise that the Commissioner has reviewed the material provided by your client and will no longer contest the solvency issue in the proceedings. However, the Commissioner continues to rely on the defence available pursuant to s 588FG of the Corporations Act 2001 (Cth).

  39  Austin J identified the issue before him (at [13]):

   

Mr Dean-Willcocks now wishes to proceed to the separate trial of the plaintiffs' unfair preference claim against the Commissioner. But he does not wish to go to the expense of commissioning an insolvency report, given that the Commissioner no longer contests the insolvency issue and that the only remaining contest between them relates to the s 588FG defence. He wishes to rely on the Commissioner's admission. The Commissioner does not object to his doing so. A problem is thought to have arisen, however, out of some observations by Finkelstein J in Crosbie v FCT (2003) 21 ACLC 1659.

  40  Austin J acknowledged that a single judge in one court has a duty to follow the decision of a single judge in another court on a point arising under the Act unless the first-mentioned judge is of the opinion that the interpretation is plainly wrong. His Honour then said (at [17]):

   

They have persuaded me, with great respect to his Honour, that his observations on that point are plainly wrong, and also that their application would interfere with the efficient and cost-effective administration of the liquidation of insolvent companies. Therefore I would not follow Crosbie on the consent order point, even if the observations were part of the ratio decidendi.

  41  His Honour referred to the 2 decisions relied upon by Finkelstein J to which I have already referred. He was of the opinion that "neither of them raises the question whether it is sufficient for the court to receive evidence that the defendant admits the relevant matters, and there is nothing in their reasoning to prevent the court from accepting an admission as sufficient for the statutory purpose". As these reasons already show, I agree with Austin J in that regard.

  42  Austin J referred to the costs that liquidators might be obliged to incur to prove a company insolvent in circumstances where there was no issue in relation to that matter and said (at [26]):

   

In my opinion, it would be unfortunate if the law were to have the practical result of causing very substantial expenditure to be made to procure an expert's report, at the expense of unsecured creditors, where the report addresses a matter that was no longer in contest when it was commissioned.

  43  I also agree with his Honour on that matter. If the Commissioner was entitled to require a liquidator to obtain an insolvency report it means the liquidator could, at the expense of the unsecured creditors, use that report on a s 588FGB action against the directors.

  44  His Honour then concluded (at [27]):

   

In my opinion there is no general principle preventing a court from being "satisfied" of the matters that it is required by statute to address before making orders, where there is an admission between the parties; nor is there any principle requiring a court in those circumstances to undertake its own factual inquiry when the parties invite it to do no more than act upon their consent. That is not to say that the court should simply act on consent orders without any independent thought. There being no jurisdictional bar to acting on admissions under s 588FF, it is up to the court to consider, in the circumstances of the instant case, whether admissions are sufficient to warrant its being "satisfied".

  45  I agree with Austin J that the court might be satisfied and so make orders under s 588FF upon the admissions of the defendant in those proceedings.

  46  Ordinarily, as a matter of judicial comity and precedent, a single judge of this court should follow the decision of another single judge of this court, unless persuaded that the former decision is clearly or plainly wrong: Marr v Australian Telecommunications Corporations (1991) 34 FCR 82 at 85 per Hill J; Hicks v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FCA 757 at [74]-[76]. In Bank of Western Australia Ltd v FCT (1994) 55 FCR 233 at 255; 29 ATR 432 at 452; 94 ATC 4815 at 4832, Lindgren J said, in considering the interpretation given to the word "authority" in sales tax legislation by Heerey J in Government Insurance Office (NSW) v FCT (1992) 35 FCR 247; 23 ATR 198; 92 ATC 4178, that he would follow that decision unless he thought it was clearly wrong. I agree with Austin J that Finkelstein J's decision is plainly wrong.

  47  In those circumstances, I would follow Austin J's decision and decline to follow Finkelstein J's decision.

  48  In my opinion, the proper construction of s 588FF would allow parties to agree on all of the matters necessary to establish a voidable transaction under s 588FE so as to allow the court to be satisfied that the transaction is voidable because of s 588FE and that an order should be made under s 588FF.

  49  Whilst a court might act upon the admission of a defendant and so be satisfied of the matters contained in s 588FF, it is not obliged to do so. Because of the effect of s 588FGA, it would be relevant, if it were the Commissioner who was offering the concession or admission, to have regard to the interests of the persons who might be affected by that concession or admission. Ordinarily, they would be the persons who would be affected by the statutory indemnity which would be created by the orders made under s 588FF.

  50  Also, the court would have regard to the provisions of s 588E(8) of the Act which raises a statutory presumption in relation to subsequent proceedings. The court might insist that the liquidator give notice to persons who might be affected under ss 588FGA, 588FGB or s 588E, before the court was so prepared to act.

  51  The court would also have regard to the information which had been considered by the party offering the concession or admission and the extent of that party's inquiries to satisfy itself that the concession or admission should be made and acted upon by the court.

  52  It might not be appropriate, having regard to the interests of other parties affected by the admission, to simply act upon that admission. It might, in some cases, be appropriate to require the liquidator to prove strictly the matters necessary to establish the prerequisites to the exercise of the power under s 588FF.

  53  However, in my opinion, it will be appropriate, in some cases, for the court to make orders under s 588FF upon the admissions of the Commissioner of Taxation.

  54  In this case, the Commissioner could have consented to an order being made. The Commissioner had been provided with a report of insolvency by the liquidator which would have entitled the Commissioner to consent to an order against him. For the reasons which follow, the Commissioner would have been entitled to reach the view that the company was insolvent at all relevant times and that the transactions did constitute an unfair preference, and that all of the other elements had been made out so as to entitle the liquidator to an order under s 588FF.

  55  However, in this case, the Commissioner formed the opinion that he was not entitled to consent to the orders because of the decision of Finkelstein J.

  56  For the reasons I have already given, the Commissioner was wrong to so conclude but that is no criticism of the Commissioner.

  57  In any event, the matter proceeded before me with the tender of an affidavit of Mr Nicholas Cooper sworn on 9 July 2004, which exhibited a report on insolvency.

  58  The plaintiffs rely upon that report for the purpose of establishing, as they must, that the company was either insolvent at the time the transactions were entered into or, the company, by entering into the transactions, became insolvent.

  59  Section 95A provides:

   

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

 

(2) A person who is not solvent is insolvent.

  60  The issue of solvency is a factual matter which must be resolved having regard to the definition to which I have referred.

  61  The definition suggests that the issue of solvency needs to be resolved by having regard to the cashflow of a company but, of course, the sum total of its assets and liabilities, as disclosed in the balance sheet, is not irrelevant.

  62  In this case, Mr Cooper has examined the company's financial position having regard to 3 separate approaches. He has analysed the company's cashflow over the relevant period. He has had regard to the balance sheet. Lastly, he has reviewed anecdotal evidence to determine whether that evidence points to insolvency.

  63  The company was suffering a chronic deficiency in cashflow as at 15 March 2003. At that stage, its cashflow deficiency was $1,059,196. That deficiency increased to $2,321,871 as at the date of the deemed winding up.

  64  The cashflow test indicates that the company was insolvent during the whole of that period because it did not have the available resources to pay its debts as and when they were due and payable.

  65  Mr Cooper also had regard to balance sheets of the company. He compared the balance sheet of the company as at 30 September 2002, being the last balance sheet prepared for and on behalf of the company before it went into administration, and a balance sheet which he constructed as at the date of the deemed winding up, 15 September 2003.

  66  The company's working capital deficiency, which was measured by having regard to the available current assets to pay the necessary current liabilities as at 30 September 2002, was $554,867. That deficiency had increased to $2,187,994 as at the date of the company's winding up.

  67  The balance sheet test suggests that the company could not pay its debts as and when they became due and payable between the period 30 September 2002 and 15 September 2003.

  68  During the period between its incorporation on 16 September 1998 and 30 September 2002, which was the last date a balance sheet was prepared by the company, the company incurred cumulative trading losses of $4,728,223.

  69  Mr Cooper also reviewed the anecdotal history of the company. He offered the opinion that, after December 1999, the company was under continual pressure from its creditors to pay overdue debts.

  70  I have considered the material upon which Mr Cooper based that last-mentioned opinion and I am satisfied that that material supports the opinion offered.

  71  Mr Cooper's ultimate conclusion was that the company was insolvent as at 15 March 2003 and remained insolvent between that date and 15 September 2003.

  72  I accept that opinion.

  73  The plaintiffs have established that the defendant was an unsecured creditor. It entered into transactions with the company on the dates and in the amounts set out above. At the time it did so the company was insolvent. By entering into those transactions, the defendant obtained an unfair preference and thereby the transactions were insolvent transactions.

  74  In those circumstances, the transactions are voidable under s 588FE.

  75  The plaintiffs are entitled to an order against the defendant in the sum of $220,852.

  76  However, at the conclusion of the hearing, the plaintiffs indicated to me that the parties had agreed prior to the hearing that an order would be made in favour of the plaintiffs only in the sum of $190,000 and that there would be no order for the plaintiffs' costs.

  77  I was told by both the plaintiffs and the Commissioner that that settlement was a commercial settlement and did not reflect any agreement that any of the transactions had not occurred, or that the transactions were not in the sums to which I have referred.

  78  Both parties asked me to make an order that the defendant be directed to pay the company an amount equal to the unfair preferences in the sum of $190,000 pursuant to the provisions of s 588FF(1) of the Corporations Act 2001 (Cth).

  79  I must say I found the Commissioner's attitude somewhat curious. On the one hand, the Commissioner argued that I would not have been entitled to act upon a consent order but, on the other hand, it was argued that I could enter judgment for a lesser amount on an agreement between the parties.

  80  However, as I have already indicated, I am of the opinion that the court can act upon an agreement between the parties. In this case, because I am satisfied that the transactions totalled $220,852, no prejudice could be caused to any other parties if I made an order against the Commissioner in the sum of $190,000. Indeed, that could only be to the benefit of any party who might be caught by the provisions of s 588FGA.

  81  I therefore make the following orders:

 (1)  That the defendant be directed to pay the company an amount equal to the unfair preferences in the sum of $190,000 pursuant to the provisions of s 588FF(1) of the Corporations Act 2001 (Cth).

 (2)  No order as to costs.