Court upholds ATO’s right to access company records held by liquidators

Warners case

Speaking of legal disputes between liquidators and the Australian Taxation Office (ATO)*, the ATO achieved victories in July and November 2015 in the Warner case, a case which arose as part of the ATO’s attack on phoenix company activity.
* See my blogs on the Australian Building Systems case .

Warners case is reported in Commissioner of Taxation v Warner [2015] FCA 659 (the first case) and Commissioner of Taxation v Warner (No 2) [2015] FCA 1281 (the second case).

The first Warners case

A case was brought before the Federal Court because the liquidators of a group of nine companies (creditors’ voluntary winding up, June 2013) which owed millions in tax debts refused to comply with demands by the ATO that they produce company documents. Those demands were issued in the course of investigations by the Phoenix Team of the Private Groups and High Wealth Individuals Business Line at the ATO. The basis for the demands was section 264 of the Income Tax Assessment Act 1936 and section 353-10 of Sch 1 to the Taxation Administration Act 1953.

The liquidators took the position that section 264 of the ITAA 1936 must be read as subject to section 486 of the Corporations Act 2001, which states that: “The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just, and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise”. The liquidators claimed that the ATO, in common with any other creditor, must obtain a court order under section 486 before it can inspect the companies’ records held by the liquidators.

The Federal Court disagreed. It found that the liquidators were required to grant access to the documents demanded by the ATO, and that section 486 of the Corporations Act did not apply.

The group

At the bottom of this post is a list of the nine companies (known as the TJT group) involved in both the first and second case, showing their names, and former names, and their reported debts to the ATO. According to the Federal Court judge (Perry J) the group’s tax debt is/was “approximately $20 million, even without taking account of TJT (No 1)’s tax liability which is yet to be advised”. As is usually the case in phoenix activity, the companies changed their names several times. It appears from their former names that they were in business as employment, recruitment and/or human resources agents.

Reasons for decision in first case

The reasons for the decisions of Perry J are many and varied. But essentially the Court found that:
Para 3 – “the Commissioner correctly submits that s 486 of the Corporations Act has a different field of operation from s 264 and s 353-10 and does not affect the liquidators’ obligation to comply with the s 264 and s 353-10 notice. Section 264 of the ITAA 1936 and s 353-10 of Sch 1 to the TAA authorise the Commissioner to require production of documents from any person, irrespective of whether or not the recipient of the notice is the liquidator of the company tax payer or putative tax payer in liquidation.”

Para 50 – “the powers in s 264(1)(b) of the ITAA 1936 and s 353-10 of Sch 1 to the TAA are exercisable against a liquidator, irrespective of whether the liquidation is voluntary or is court ordered.”

Para 60 – For section 264 or section 353-10 to intentionally exclude liquidators from their scope “would undermine the purpose of the provisions in enabling the Commissioner to undertake wide-ranging inquiries in the discharge of her or his obligation to administer the taxation laws”.

Para 64 – “s 486 of the Corporations Act purports in terms to deal only with the inspection of books by creditors and contributories. It does not deal with the possession of the company books. ”

Para 65 – “the reference to a “creditor” in s 486 of the Corporations Act describes a person whose relationship with the company is encapsulated within the concept of debtor and creditor. However, it does not capture and, in my view, is not intended to capture, the added dimensions of the relationship between the company and an officer of the ATO seeking to utilise compulsive powers in the exercise of an independent discretion against the liquidator in the administration of the tax laws, even though the company may have a tax liability. ”

Para 67 – “the fact that the Commissioner is as far as possible placed on a par with other creditors with respect to the ultimate distribution of the company’s assets, does not mean that it should be on a par with other creditors insofar as access to the company books is concerned. The position of the Commissioner is relevantly different in a number of respects which in my view confirm a contrary intention. ”

Para 70 – “No reason is therefore apparent as to why, in the context of liquidations, the Parliament would wish to restrict the Commissioner’s capacity to require production and use of such documents because the person from whom production was sought had gone into liquidation. ”

Para 71 – “For these reasons, I consider that a declaration should be made that the obligation of the …liquidators to comply with the notice issued under s 264 of the ITAA 1936 and s 353-10 of Sch 1 to the TAA served on them in their capacity as liquidators of the TJT group is not subject to, or affected by, s 486 of the Corporations Act, including as applied by s 511 of that Act. The question of costs is reserved in order to allow an opportunity to the parties to be heard given that the (liquidators) against whom the Commissioner seeks his costs, submitted to any order that the Court may make save as to costs.

The second Warners case

The second hearing arose out of the first, and was about liability for legal costs incurred by the ATO.

No appearance at first hearing

When the liquidators (Anthony Warner and Steven Kugel) refused to comply with the ATO’s demand that they hand over the books of the companies, they told the ATO that unless the notice was withdrawn, they would seek directions from the court on what they regarded as a conflict of law. In addition they claimed that the ATO should be the party who brings the legal action, as a test case or public interest litigation.

Before and after the ATO instituted proceedings (“the first case”), there was important correspondence between solicitors for the opposing parties concerning the question of costs. The ATO made an offer to the liquidators that – provided they took an active role in the proceedings (so that submissions in accordance with the liquidators’ view could be made to the court) – the ATO would agree to orders that each party pay their own costs. The liquidators’ solicitors did not respond to this offer. Later the liquidators filed with the court a “submitting appearance”, for the purpose of informing the court that they were willing to submit to any order the court may make, except in relation to legal costs.

This left open the question as to whether the liquidators intended to take an active role in the court hearing. So this question was put to the liquidators by the ATO, who noted that the court had indicated it would be assisted by having a contradictor appear. Again the liquidators’ solicitors did not respond. As a result the ATO arranged for a barrister to appear for the purpose of making submissions as a contradictor, i.e. to put to the court what the barrister thought the liquidators might argue.

Argument

Three questions had to be considered in this case:
1. should the ATO’s costs be awarded against the liquidators;
2. should the liquidators also be liable for the costs incurred by the ATO in arranging for the “contradictor” (the amicus curiae) to appear; and
3. should costs awarded against the liquidators be paid out of the companies’ funds, as an expense in the liquidations, or should they be paid by the liquidators personally.

…. TO BE CONTINUED ….