Creditors are sometimes paid by other members in a corporate group. Where the corporate group becomes insolvent, there may be a scramble among liquidators of the various companies to recover creditor payments as unfair preferences, or uncommercial transactions. This situation occurred in Re Cyberduck Software Pty Ltd (in liq) & Anor [2018] VSC 122.
Facts
Cyberduck Software Pty Ltd (Cyberduck) was indebted to the Australian Taxation Office (ATO). A related company, R & D Pty Ltd (R&D), was also indebted to the ATO. Cyberduck claimed a GST refund from the ATO for input tax credits for goods or services purportedly acquired during a taxation reporting period. Cyberduck authorised and directed the ATO to apply the refund to the taxation debt of R&D (instead of receiving the refund itself).
Both Cyberduck and R&D went into liquidation at different times, although the same liquidator was appointed to each company. The liquidator of Cyberduck claimed against the ATO for having benefited from an uncommercial transaction under Section 588FB of the Corporations Act 2001 (Cth) (Act) in receiving the refund belonging to Cyberduck for a third party. On behalf of R&D, the liquidator claimed in the alternative that the ATO received an unfair preference under section 588FA of the Act, as a third party payment was made by Cyberduck on its behalf.
The ATO defended the claim on the basis that a subsequent audit of the input tax credits of Cyberduck meant the tax refund should not have been available in the first place (as Cyberduck never paid the invoices for which the GST tax credits were claimed). The ATO audit was conducted well after the commencement of the liquidations.
Outcome
Efthim ASJ of the Supreme Court of Victoria found that the payment was both an uncommercial transaction1 and an unfair preference, meaning that both Cyberduck and R&D had conflicting claims to impugn the transaction. The ATO was unable to establish the defence that it had no reasonable grounds to suspect that R & D was insolvent.2
The ATO also claimed that the input tax credit refund transaction was really a fiction, as the audit showed that nothing was payable for the input tax credits. This was rejected, as the audit, being an event that occurred after the liquidation, did not form part of the relevant ‘transaction’.3
However, his Honour recognised that granting relief under s 588FF(1) of the Act would confer a windfall upon either Cyberduck or R&D. This issue required Efthim ASJ to decide if section 588FF(1) of the Act was mandatory for the Court to grant some form of order to a successful liquidator, or if there was a discretion to refuse relief in section 588FF(1). Some earlier case authorities suggested that the Court has a discretion only about the type of order to be made, and that it was mandatory to make an order.4
His Honour declined to follow this line of authority and expressed his agreement with the obiter dicta view of the Full Federal Court in Great Investments Ltd v Warner5 that the Court has a discretion in making an order. His Honour refused to make an order under section 588FF(1) due to the potential windfall to Cyberduck or R&D.6 The liquidator was unsuccessful.
This article was written by Matthew Broderick, Partner.
Publication Editor: Grant Whatley
1At [61]. It was uncommercial as there was no evidence that the discharge of the tax liabilities by Cyberduck resulted in the extinguishment of any equivalent liabilities owed to it by R & D.
2At [82]. This defence is set out in Section 588FG(2) of the Act.
3At [32].
4For instance, Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 (Einstein J) and Cussen v Sultan (2009) 74 ACSR 496 (Nicholas J).
5(2016) 243 FCR 516.
6At [89].