Statutory demands – decisions by the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41 & the Federal Court in West International Pty Ltd v Ultradrilling Pty Ltd [2008] FCA 1443

October 4, 2008 |

Nothing like a global downturn to make lawyers brush up on their insolvency law.  The starting point for a creditor winding up a company is the statutory demand.  The Tax Commissioner is a promiscious user of this particular legal scalpel.  So it is timely to consider two recent decisions on statutory demands; Broadbeach and  West International. The High Court decision in Broadbeach is particularly important in limiting the discretion available to the courts when considering an objection to a statutory demand based on an assessment by the Australian Taxation Office.

Broadbeach

At its simplest this decision makes clear that a statutory demand issued by the Australian Taxainn Ofifce where the debt is an assessment can not be challenged on the grounds, set out in the Corporations Act, that there is a genuine dispute about the sum of a debt (section 459H(1)(a)) or there is some other reason to set aside the debt (section 459J(1)(b)).  Just to make entirely clear  their Honours said, at [12]:

…if there are failures to comply with the then outstanding statutory demands, on timely applications by the Commissioner to wind up the respondents in insolvency the court hearing those applications must presume that the respondents are insolvent (s 459C(2)(a)).

In this case Broadbeach had objected to the assessment.  The internal review by the ATO rejected the objection.   Broadbeach exercised its rights to review to challenge the assessment in the Administrative Appeals Tribunal.  While that process was underway the ATO served the statutory demand.

Conclusive Proof of debt

The ATO’s argument was  that:

  1. challenging an assessment is not a genuine dispute either as to the existence or the sum of a debt the subject of a statutory demand [see par 22]; and
  2. challenging an assessment does not constitute some other reason for the purpose challenging a statutory demand [see par 22].

The Court accepted those submissions with open arms.  The logic behind the High Court’s ruling is:

  1.  the production of an assessment is conclusive evidence that an assessment is correct [par 26]
  2. the fact that there is a review does not impede recovery under the assessment [par 29];
  3. there is a longstanding legislative policy to protect the interests of the revenue and as such even if the provisions operative harshly they are immutable [par 44];
  4. even though s 459G grants Federal and Supreme Courts broad discretion to set aside statutory demands the operation of the Assessment Act constrains courts when dealing with statutory demands based on assessments under the Act [par 49].

It is interesting that the Court and the ATO acknowledge there is a distinction between the debt and the general interest charges.  General interest charges usually blow out the debt significantly.  The latter may be the subject to genuine dispute and the statutory demand may be varied to that extent [par 9].

West International

In this decision of Gordon J the issues were:

  • role of the court on review from a registrar of the Federal Court; and
  • what constitutes a genuine dispute for the purposes of challenging a statutory demand;and
  • how do you approach offsetting claims.

Review

Gorodon J, not surprisingly, found that a review of the Registrar’s decision on a review is a hearing de novo. Gordon J pithilly summed her analysis, at par 6:

6 The function of the Court, on review of a Registrar’s decision under s 35A(5) of the Federal Court Act, is to rehear the case and decide the facts for itself. It is a hearing de novo. That is to say, it is a complete rehearing at which the parties may adduce further evidence. It is for the Court to be satisfied of the matters prescribed by the Act and to exercise the discretion unfettered by the decision of the Registrar. The cases that make good those propositions include: Mazukov v University of Tasmania [2004] FCAFC 159 at [22][27]; and Martin v Commonwealth Bank of Australia (2001) 217 ALR 634 at [6] and [12] and Callegher v Australian Securities and Investments Commission (2007) 239 ALR 749 at [46]. 

What is often ignored by practitioners is that at the rehearing further material can be submitted, by either side.  If there is a chance to remedy defects it should be taken.

Her Honour succintly set out the principles applicable in setting aside a statutory demand (which are the same in an offsetting claim – par 9)at par 7:

…The Court must be satisfied that there is a genuine dispute … about the existence or amount of the debt to which the demand relates: s 459H(1)(a) of the Act. That issue is determined at the time the Court hears the application: Andi-Co Australia Pty Ltd v Meyers [2004] FCA 1358 at [16]. For a genuine dispute to exist, the dispute must “be bona fide and truly exist in fact”. The grounds for alleging the existence of a dispute must be “real and not spurious, hypothetical, illusory or misconceived”: Spencer Constructions Pty Ltd v G&M Aldridge Pty Ltd (1997) 76 FCR 452 at 464; see also John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250 at 253 and TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (2008) 66 ACSR 67 at 79

The court only looks to the affdavit material.  While it makes no finding of fact it has to enquire whether the deposed facts give some basis for claiming a genuine dispute exists.

On the question of determining whether there was an offsetting claim her Honour found the contractual basis for the claim not a straightforward matter.  But even if the claim will ultimately fail at trial, or is even likely to do so, that is irrelevant.  Is there a basis to say there is a dispute upon which a court has to make a finding of fact and law at trial.  As she said, at par 30:

 30 For present purposes, I am satisfied that an offsetting claim with sufficient prima facie plausibility to merit further investigation does exist. It now remains only to consider the amount of that claim, and whether it is such as to justify the setting aside of the Statutory Demand. For that, I turn to examine the three components said by West to constitute the offsetting claim.

In this case the court found that of the balance outstanding of $155,397 of the original statutory demand there was $47,916 in genuine dispute and $151,610 in offsetting claims.  Those sums exceed the balance hence the statutory demand should  be set aside.

Leave a Reply