In the matter of Rivercorp Pty Limited

Articles, Restructuring + Insolvency

A recent Supreme Court decision has made it clear that the ATO cannot hide behind its own internal policies as an excuse not to pay a liquidator’s costs of court action to recover unfair preferences.

Liquidators seeking to recover unfair preferences from the ATO are often confronted with a response to the effect “Oh yes, we know it’s a preference, but we are not going to pay it back unless you take us to court”. The reason for this antagonistic response is that section 588FGA of the Corporations Act 2001 (Cth.) only permits the ATO to chase a director for indemnity for a clawed back preference “if the Court makes an order” requiring the ATO to pay the relevant amount back. The ATO therefore routinely forces liquidators into court to recover debts that are not even in dispute.

Of course, what often happens when such court proceedings are commenced are that the directors, seeing the writing on the wall, seek to intervene and defend the proceedings. They have the right to do this and, if you think about it, it makes sense, seeing as liability is ultimately sheeted back to them. You therefore end up with the somewhat farcical situation where a liquidator is suing the ATO for a debt which the ATO admits is owing, but the director then jumps in, insists that the ATO and the liquidator are both wrong, and takes the liquidator to task.

Such conduct on the part of the director inevitably leads to delay and an increase in costs. In a recent decision of the Supreme Court, the central issue was whether the ATO should have to fix the liquidator up for those costs (or at least the legal costs), or whether the liquidator should bear them himself. The background to the decision in In the matter of Rivercorp Pty. Limited [2012] NSWSC 576 (decided on 7 May) was as follows:

  • The liquidator commenced proceedings against the ATO to recover a series of preferential payments.
  • The ATO initially defended the proceedings, and also cross-claimed against the director.
  • On 21 September 2011, the liquidator made an offer to the ATO to settle for $1,139,039. The ATO rejected that offer and fought on.
  • On 14 December 2011, the ATO announced its intention to abandon its defence. However, it continued its cross-claim against the director, and permitted the director to contest the question of insolvency on its behalf.
  • Eventually, on 2 April 2012, the court gave judgment in favour of the liquidator against the ATO in the amount of $1,298,356.

In our experience, upon the conclusion of cases like this, the ATO often represents to the liquidator that it is not liable for costs because its policies forbid it to pay the debt or accept an offer of settlement. Such representations, coupled with the liquidator’s desire to get it all over and done with (and his or her reluctance to burden creditors with yet more expense), often motivate the liquidator – perfectly reasonably – to make a commercial decision not to seek costs.

In this matter, however, the liquidator was not prepared to walk away. Instead he said, in essence, “Look, I made a reasonable offer to settle this claim. You rejected it and forced me to fight on, and I ended up getting judgment for even more. You should never have forced creditors to incur all those extra costs. You should pay them back.”

The ATO predictably responded “We cannot settle claims like this, because our policy says we can’t, even if we admit the debt is owing.” It was in those circumstances that the court was called upon to determine the issue of costs.

After dealing with a couple of preliminary points, the court turned to the ATO’s main argument – that it should not be blamed for refusing to settle in circumstances where its policy prevents it from settling. It is fair to say the argument was not well received. In accordance with logic and common sense, the court’s view was that the ATO cannot get away with eminently unreasonable and simply by promulgating an internal policy requiring it to defend valid claims and reject reasonable settlement offers:

The Commissioner may, if he wishes, impose such a restriction on his practices, but I am unable to see why that should operate adversely to the entitlements of any other parties, whether substantive or in respect of costs.

Indeed, it is difficult to see why the Commissioner’s self imposed policies are of any relevance to the position of external parties that choose to sue the Commissioner; and, in particular, why the Commissioner should not suffer those consequences of not accepting a reasonable offer of compromise that any other party would, in like circumstances, suffer.

If anything, the Commissioner’s avowed status as a model litigant points in the opposite direction.

The court then continued to say that if the ATO realises that it is unlikely to succeed in resisting the liquidator’s claim, but still wants to chase the director, then the ATO should run the claim against the director itself, not force the liquidator to run it:

If – recognising that he cannot or is unlikely to succeed in resisting the plaintiffs’ claim – the Commissioner needs to prove insolvency against the [director] …the Commissioner must find and adduce such evidence as is necessary – which may include evidence already served by the plaintiff or could be obtained on subpoena – to prove that case against the [director].

It seems to me that the need to prove the case against the [director] is not a sufficient reason to keep the plaintiffs’ proceedings on foot and require the plaintiff to incur further costs…

In the course of argument the ATO did bring the court’s attention to an earlier decision – Noxequin v. DCT [2007] NSWSC 87 – where the court had said exactly the opposite:

…it should be recognised that the Commissioner would have brought the proceedings to an end on 4 July 2006 had it not been for the continuing opposition of Mr Soong. I accept the submission made on behalf of the Commissioner that the Commissioner should be ordered to pay the costs of the plaintiff up to and including 4 July 2006 and that Mr Soong should be ordered to pay the costs of the plaintiffs after 4 July 2006.

The court refused to let Noxequin stand in its way. It decided that Noxequin turned on its own special circumstances and did not “lay down a rule of law “. Any such rule, the court said, would be weird, because it would mean the liquidator’s primary recourse for costs would be the director, even though the liquidator had not even sued the director, and the only reason the director was in court in the first place was because the organisation the liquidator had sued had dragged him there under protest.

After making clear that Noxequin did not result in a general rule, the court made clear that it intended that the decision it was about to make was intended to set down the new general rule:

In my view, there is no rule that in cases such as the present the Commissioner should be liable for a plaintiffs’ costs only until he indicates that he will not maintain the defence any further, and, thereafter, that the cross-defendant should be liable for those costs. On ordinary principles, the unsuccessful defendant Commissioner should be responsible for the successful plaintiffs’ costs, including those incidental to the Commissioner’s cross-claim for indemnity.

What does this mean for us? In light of the decision in Rivercorp, it is now fairly clear that the ATO cannot hide behind its own internal policies as an excuse not to wear a costs order where it has unreasonably forced a liquidator into court to recover a debt which it should have paid without protest on Day 1.

This is a sensible decision which, if taken up by other courts (and the judge certainly seemed to intend that it would be) will place the burden of costs where it ought to lie in such circumstances – not on creditors, but on the obstructive “model litigant” which admits it has received a preferential payment, but refuses to return it and instead burdens creditors with the costs of a court case.

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