Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon John Dawkins, M.P.)

PART B CORPORATIONS LAW Chapter 4 Consequential amendments to the Corporations Law, the Bankruptcy Act 1966 and the Crown Debts (Priority) Act 1981.

Summary of proposed amendments

Purpose of amendment: The proposed amendments to the Corporations Law are relatively minor and technical and support measures to be included in the Assessment Act. Broadly, they seek to put the Commissioner in the same position as other creditors, so that the Commissioner has clear access to all the remedies enjoyed by other creditors. Amendments to the Bankruptcy Act 1966 (Bankruptcy Act), the Crimes (Taxation Offences) Act 1980 and the Crown Debts (Priority) Act 1981 are purely consequential.

Date of effect: The amendments will apply to unremitted tax amounts which become payable after 30 June 1993.

Background to the legislation

The proposed amendments to the Corporations Law are relatively minor and technical and support measures to be included in the Assessment Act. Broadly, they seek to put the Commissioner in the same position as other creditors, so that the Commissioner has clear access to all the remedies enjoyed by other creditors.

The abolition of the Commissioner's priority is essential for the smooth and efficient operation of the proposed voluntary scheme of administration under the new insolvency provisions of the Corporations Law introduced by the Corporate Law Reform Act 1992 . These provisions are due to commence in June this year.

Explanation of the proposed amendments

Definition of Corporations Law

Clause 20 defines "Corporations Law" to mean the Corporations Law set out in section 82 of the Corporations Act 1989 .

Tax debts incurred during the voluntary administration moratorium to enjoy the same priority as other debts incurred during that period.

Under the voluntary administration procedure in Part 5.3A of the Corporations Law (introduced by the Corporate Law Reform Bill 1992 ), a moratorium will be imposed on recovery action by all creditors, including the Commissioner. However, for the period that the company is under administration the administrator will be personally liable for debts he or she incurs for services rendered, goods bought and property hired, leased, used or occupied. This period will usually last for 35 days but can be extended to 95 days under certain circumstances. The administrator will be indemnified for his or her liability out of the company's property. On any winding up of the company that indemnity will be afforded a very high priority, following only the expenses of preserving, realising or getting in the company's property and, in the case of a court ordered winding up, the costs of the application for the order.

To enable the Commissioner to enjoy the same high priority in relation to tax debts that is already accorded to debts for services rendered, goods bought and property hired, leased, used or occupied during the moratorium period, the proposed amendments [new section 443BA - inserted by clause 21] will provide that the administrator will also be personally liable (in relation to those amounts referrable to the period of the administration) for amounts of tax due under a remittance provision .

Remittance provisions for the purposes of the section are sections 221F, 221G, and subsections 221YHDC(2), 221YHZD(1), 221YHZD(1A) and 221YN(1) of the Assessment Act [new subsection 443BA(3)] .

Section 443C of the Corporations Law is amended by Clause 22 by substituting the reference to Subdivision A for the reference to sections 443A and 443B.

In relation to tax debts incurred prior to the administration, the Commissioner is to be in the same position as other creditors, being able to vote on a deed of company arrangement and share rateably on any winding up [section 443D as amended by Clause 23] .

Commissioner to make a statutory demand on the basis of an estimate

One of the difficulties presently experienced by the Commissioner in the recovery of tax debts is the necessity to ascertain exactly the amounts which are owing by a company before being in a position to issue a statutory demand (Division 2 of Part 5.4 of the Corporations Law introduced by the Corporate Law Reform Bill 1992 ).

To better equip the Commissioner to act quickly for the recovery of tax debts, the proposed amendments will enable the Commissioner to serve a demand on a company for the payment of the liabilities of the company under a remittance provision where the demand specifies the estimate of liability made by the Commissioner even if the liability arose prior to the commencement of the section [new subsection 459E(5)] .

Remittance provisions for the purposes of the section are sections 221F, 221G, 221P and subsections 221YHDC(2), 221YHZD(1), 221YHZD(1A) and 221YN(1) and new section 222AHA of the Assessment Act.

Express provision for the Commissioner to take advantage of insolvent trading provisions in Part 5.7B to allow recovery from directors where tax debts are incurred while company is insolvent

In order to place the Commissioner in the same position as other creditors and to avail himself of the statutory provisions of the Corporations Law prohibiting insolvent trading and providing for voidable transactions, (Part 5.7B, introduced by the Corporate Law Reform Act 1992 ), the proposed amendments will expressly provide that the liabilities of a company under a remittance provision will be debts [new section 588F- inserted by clause 25] .

Remittance provisions for the purposes of the section are sections 221F, 221G, and subsections 221YHDC(2), 221YHZD(1), 221YHZD(1A)and 221YN(1) of the Assessment Act [new subsection 588F(2)] .

To deem tax debts to be for valuable consideration to enable the Commissioner to avail of the defence in the voidable transactions provisions

The voidable transactions provisions in Division 2 of Part 5.7B of the Corporations Law (introduced by the Corporate Law reform Act 1992 ) enable a liquidator to void dispositions of company property which may be characterised as unfair preferences, or as dispositions at an undervalue, and which occurred within a limited period prior to the winding up of the company. One of the elements of a successful defence to a recovery action by the liquidator in relation to such dispositions requires the disposition to have been made for valuable consideration. (Another element is that the person to whom the disposition is made was not aware of the insolvency of the person making the disposition [see new sections 588FG and 588FGA] .

To enable the Commissioner to avail of this defence, payments in respect of a person's tax liabilities are deemed always to be for valuable consideration [new subsection 588FG(3)]

The aim is to ensure that the Commissioner is in as near as possible the same legal position as other creditors who receive payments just before the insolvency of a debtor, so that the Commissioner is not put to potential challenge in respect of every such transaction.

Where the liability of a director is avoided through a preference payment by the company, the position of Commissioner will be made equivalent to a guaranteed creditor

As mentioned above, one of the elements of a successful defence to a recovery action by the liquidator in relation to such dispositions requires the disposition to have been made for valuable consideration. The risk remains, however, flowing from the Commissioner's possible possession of financial details of the company's health (through the receipt of tax information etc), that the Commissioner might still be precluded from asserting a defence under the voidable transactions provisions, on the basis that he or she was aware of the insolvency of the person making the disposition.

To ameliorate this result the proposed amendment provides that where a court order is made against the Commissioner (under section 588FF of the Corporations Law, introduced by the Corporate Law Reform Bill 1992 ) requiring the return of the money paid by the company to discharge its liability under a remittance provision , the directors of the company at the time when the payment was made shall indemnify the Commissioner for any loss or damage suffered by the Commissioner as a result [new section 588FGA - inserted by clause 27] . The amount recoverable by the Commissioner is a debt due to the Commonwealth and may be recovered in a court of competent jurisdiction by the Commissioner or Deputy Commissioner [new subsection 588FGA(3)] .

Remittance provisions for the purposes of the section are sections 221F, 221G, 221P, subsections 221YHDC(2), 221YHZD(1), 221YHZD(1A) and 221YN(1) and new section 222AHA of the Assessment Act.

What rights does a director have under new section 588FGA ?

Where a director is required to indemnify the Commissioner, that director has the same rights, whether by way of indemnity, subrogation or contribution against the company or any other person that he or she would have had, had the payment of the liability been jointly and severally guaranteed by those persons [new subsection 588FGA(5)] .

What defences does a director have in relation to new section 588FGA?

New section 588FGB (inserted by clause 27) applies where a director or some other person becomes liable to pay the Commissioner under new section 588FGA or pay, by way of contribution, some other person who has a liability to the Commissioner under new section 588FGA . It is a defence if it is proved that at the time of the original payment to the Commissioner (and ordered to be returned) that the person believed on reasonable grounds that the company was solvent at that time and would remain so even on the making of that payment [new subsection 588FGB(3)] . For the purposes of this defence, a director may base a reasonable expectation on the advice of a reliable and competent subordinate or fellow director [new subsection 588FGB(4)] .

Other defences provided for by new section 588FGB are that because of illness or for some other good reason the person did not take part in the management of the company at the time of the original payment [new subsection 588FGB(5)] , or that the person took all available reasonable steps to prevent the company from making the payment [new subsection 588FGB(6)] , including voting for the appointment of an administrator under Part 5.3A of the Corporations Law.

Application of compensation in relation to insolvent trading and voidable transactions

Section 588Y of the Corporations Law (introduced by the Corporate Law Reform Bill 1992 ) provides that where money is recovered by a liquidator under Part 5.7B of the Corporations Law, it is not available for distribution to those creditors who knew of the insolvency of the company at the time that the debt was incurred. Because this could operate unfairly against the Commissioner, as a result of the possible constructive knowledge of the sort referred to above, the proposed amendment will remove this limitation in relation to the Commissioner [new subsection 588Y(4)] .

Amendments of the Bankruptcy Act, Crown Debts (Priority) Act 1981 and Crimes (Taxation Offences) Act 1980 as per the Schedule

Bankruptcy Act

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removes the requirement from subsection 109(1) that the Trustee, in the making of payments to creditors, is subject to sections 221P and 221YU of the Assessment Act.

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inserts after subsection 109(1), new subsection 109(1A) which makes section 109 (1) subject to the Child Support (Registration and Collection) Act 1988 ; and sections 221P and 221YU, and subsections 221YHJ(3),(4) and (5), and 221YHZD(3),(4) and (5) of the Assessment Act.

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substitutes a new paragraph 122(4)(b) and subsection 122(7) and omits subsection 123(5).

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New paragraph 122(4)(b) has the effect of deeming payments of tax to the Commissioner to be for valuable consideration, and in the ordinary course of business and is analogous to the provisions of new subsection 588FG(3) in the Corporations Law.

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New subsection 122(7) defines "taxes" payable under a law of the Commonwealth or of a State or Territory, including, for example, levies, charges, and municipal rates.

Crown Debts (Priority ) Act 1981

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omits from section 4, the words "221YHJ, 221YHZD or" and substituting "subsections 221 YHJ(3), (4) and (5) or 221YHZD(3), (4) and (5) or section".

Crimes (Taxation Offences) Act 1980

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extends the meaning of "income tax" in subsection 3(1) to include amounts payable under new Divisions 8 and 9 of Part VI of the Assessment Act.