In the March 2021 case, In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (In Liq) [2021] NSWSC 232, the NSW Supreme Court has confirmed when payments made to the ATO from a company (later becoming unfair preferences) while under a deed of company arrangement (DOCA) were not ‘authorised’ by the deed administrator.
In Western Port Holdings, Justice Rees of the NSWSC has upheld and applied the reasoning of a recent decision by the Full Federal Court in Ready Kit Cabinets.
In summary, some $2 million was paid to the ATO over an 18 month period while the company was subject to a DOCA, which was found to be an unfair preference and the ATO was ordered to repay $2 million in voidable transactions to the liquidator, with costs.
Under section 588FE(2B)(d)(i) of the Corporations Act 2001 (Cth), a transaction is not considered voidable if it was entered into ‘under the authority of the administrator of the deed’, as set out below:
(2B) The transaction is voidable if:
…
(d) the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of:
(i) the administrator of the deed …
The earlier case – Ready Kit Cabinets
On appeal in the Full Federal Court in Commissioner of Taxation v Yeo as Liquidator of Ready Kit Cabinets Pty Ltd (In Liq) [2020] FCAFC 199, the ATO has argued that payments made to it, while the company was subject to a DOCA, were authorised by the deed administrators and therefore not voidable under s 588FE(2B)(d)(i).
At first instance, and on appeal, the ATO argued that a number of payments made to it by Ready Kit Cabinets while under DOCA were authorised by the deed administrator on the following grounds:
- The making of the payments was specifically required to give effect to, and cause compliance with, the terms of the DOCA;
- The DOCA of the Company expressly covenanted to make the Payments;
- The deed administrators accepted that they were acting as the agents of the Company when exercising the powers conferred by and carrying out their duties under the DOCA; and
- By the operation of s 444G of the Corporations Act both Mr Yeo and Mr Rambaldi were bound by the DOCA.
The ATO’s argument was rejected at first instance and on appeal by Justices Jagot, Davies and Markovic as they explain at [34]:
“the fact that making the payments was the “price to be paid” as part of the compromise represented by the DOCA does not mean that the making of the payments should be taken to have been by or under the authority of the deed administrators.”
The following case – Western Port Holdings
In both cases, the control of the company was returned to the directors during the DOCA period and the terms of the DOCA required the company to meet its tax lodgement and payment obligations during that period. If it did not, the deed administrators could take steps to terminate the DOCA and place the company into liquidation, which later occurred in both cases.
In Western Port Holdings, the deed administrators played an ‘active’ role in requiring the company to make payments to the ATO including that they:
-
- Sought details and were informed about the company’s compliance with tax liabilities;
- Followed up the company and the ATO in respect of unpaid amounts;
- Sought confirmation whether tax liabilities had been paid; and
- Issued several notices of default requiring the company to rectify its breaches of the DOCA, including to pay its outstanding tax liabilities accrued during the DOCA period.
Notwithstanding the deed administrator’s role in chasing the company to pay the ATO, the court found that (consistent with Ready Kit Cabinets) the payments were not ‘authorised’ by the deed administrators; at [157]:
“control of the company was returned to the directors pursuant to the DOCA. The payments were made by the directors exercising that control. The payments were therefore made under the authority of the directors. There is no occasion in s 588FE(2B) to look behind the authority of the directors to ask how that authority came about.”
Accordingly, the payments in excess of $2 million were clawed back from the ATO as a preference.
The Western Port Holdings judgment also dealt where preferences paid by third parties were in effect “from the company”, which we cover in a separate article here.
In this author’s opinion, both judgments correctly distinguish the deed administrator’s role (in monitoring and enforcing deed compliance) from the company director’s role in controlling the company (including making and authorising its transactions) during the DOCA period.
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