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High Court tells Tax Office to ‘get back in the queue’ in company winding up

26 August 2009 was a big day for the High Court. Not only did they find the Australian Military Court unconstitutional, they also overturned the decision of the Full Court of the Federal Court in Bruton Holdings Pty Ltd v Commissioner of Taxation [2008] FCAFC 184.


The decision of the Federal Court

Director Penalty Notices are undoubtedly one of the ATO’s best debt recovery weapons but s260-5 Notices (“garnishee notices”) were an even better weapon after the Bruton Holdings decision. The Full Federal Court’s decision, in summary, would have meant that:

  • The Tax Commissioner could take priority over other creditors, including secured creditors
  • The Tax Commissioner could have issued garnishee notices AFTER a winding up had commenced – thereby gaining priority
  • The decision made a “trade on” by liquidators a riskier proposition as the Tax Commissioner could issue garnishee notices and take any profits
  • Garnishee notices could require any debtor to pay money to the Tax Commissioner

The High Court decision

s500(1) of the Corporations Act 2001 says that:

Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void

While the Federal Court thought that this did not apply to s260-5 Notices, the High Court held that it does and thus:

the power conferred on the Commissioner by s 260-5 does not extend to the case of a company in liquidation … the Commissioner’s general powers under s 260-5 are not available if there has been a resolution passed for the winding up of a company or if an order for winding up has been made

What does it mean?

The High Court decision is great news for insolvency practitioners. Once a winding up resolution has been passed or a winding up order made, recoveries from debtors are now available to fund a trade on, be available for distribution and indeed fund the costs of liquidation. The Tax Commissioner’s freedom to “leapfrog” all other creditors has been wound back.

 

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