Unfair preferences and the Commissioner of Taxation
Insolvency Update – Autumn 2013
There is little doubt that Commissioner of Taxation is the most common defendant to unfair preference claims by company liquidators. Recovery actions against the Commissioner are often the first such action to be pursued by a liquidator. This is hardly a surprising strategy in circumstances where the Commission is a solvent well-resourced defendant.
Given the frequency with which the Commissioner is required to respond to such claims and the inability to avail himself of the running account defence provided by section 588FA(3) of the Corporations Act – Sands and McDougall Wholesale Pty Limited (in liq) -v- Commissioner of Taxation  VSCA 76 – the Commissioner has understandably developed legal arguments designed to limit the Commissioner’s exposure in relation to unfair preference claims.
One such argument has been to contend that the requirement in s 588FA(1)(b) – that, for a transaction to be an unfair preference, the creditor must have received more from that transaction then the creditor would have received had it proved for the debt in the winding up of the company – is to be assessed by reference to a hypothetical winding up conducted at the time of the relevant transaction, rather than the actual winding up in which the claim against the Commissioner is made.
However, a recent case appears to confirm that this argument (presently enshrined in the Practice Statement of the Australian Taxation Office PS LA 2011/16) will no longer be open to Commissioner.
In Kassem and Secatore -v- Cmr of Taxation  FCA 152, the Full Federal Court stated as follows in relation to the argument: ‘…the short answer to the Commissioner’s contention is that s 588FA(1)(b) does not require consideration of a hypothetical winding up at the date of the impugned payment. It requires a comparison between the amount the creditor actually received and what it would receive in the actual winding up’ (at ).
Based on the decision, liquidators are entitled to reject any assertion that they need look beyond the actual winding up in which the unfair preference claim was made in order to establish the preferential nature of the payments.
Consequently, s 588FA(1)(b) of the Act appears increasingly unlikely to provide creditors with a basis to resist an unfair preference claim.