Taxing times for the Deputy Commissioner: Federal Court rules that payments made under a DOCA were unfair preferences - Insolvency/Bankruptcy

This week's TGIF considers a recent case where the Federal Court ordered payments made while a DOCA was in force, to which the deed administrators were signatories, were recoverable as unfair preferences.

Key Takeaways

If payments to creditors are made "by, or under the authority of" a company's administrators, then the Court cannot find that they are voidable transactions.
However, not all payments made while a company is in administration, or even during the period where a DOCA is in force, will be made "by, or under the authority of" the administrators. Accordingly, those payments might be liable to be clawed back.
This may occur even in circumstances where the transactions are authorised by a DOCA itself, and the deed administrators are signatories.

What happened?

On 15 May 2020, the former deed administrators and liquidators (the Applicants) of Ready Kit Cabinets Pty Ltd (in liquidation) (the Company) successfully recovered payments made to the Deputy Commissioner of Taxation (DCT).

The Federal Court ordered that payments made by Ready Kit Cabinets Pty Ltd (in liquidation) (the Company) to the DCT were recoverable as "unfair preferences" under the Corporations Act 2001 (Cth) (the Act).

Background to the application

On 29 October 2013, the Applicants were appointed as joint and several administrators of the Company. A deed of company arrangement (DOCA) was subsequently executed by the Company, the Applicants as deed administrators and the director.

The DOCA provided that:

management and control of the Company's affairs were vested in the director;
the Company and director made a number of covenants and undertakings. Importantly, these undertakings were made with respect to the Company's compliance with its taxation obligations; and
in the event of default, the Applicants (in their capacity as deed administrators) were to convene a meeting of creditors to determine whether the DOCA ought to be terminated and the Company wound up.

Between 28 February 2014 and 16 June 2017, the Company made payments to the DCT totalling $304,772.15 (the Payments) in respect of its tax liabilities. The Payments were made while the DOCA was in force.

The Company owed an amount of unsecured debt estimated at $652,676.49.

The Application

The liquidators commenced proceedings against the DCT, seeking to recover the Payments as unfair preferences.

Relevantly, the Act provides that a transaction will not be voidable if it was entered into on behalf of the company "by, or under the authority of" the administrators of a DOCA or of the company.

Accordingly, the key issue in this case was whether the Payments were made "by, or under the authority of" the administrators.

The Applicants contended that:

the director made the Payments pursuant to his authority to do so, which was derived from the DOCA and the Company's;
accordingly, the Payments were not made "by, or under the authority of" the deed administrators;
similarly, the covenant in the DOCA which required the Company to comply with its taxation obligations did not mean that the payments were made "by, or under the authority of" the deed administrators; and
consequently, the Payments were voidable.

The DCT contended that the Payments were made "by, or under the authority of" the deed administrators for three reasons:

First, the DCT argued that the Payments were necessitated by the terms of the DOCA.
Secondly, the DCT said that the "by, or under the authority of" limitation on voidable transactions was introduced to address concerns that transactions which occur during the course of a voluntary administration specifically authorised by a DOCA ought not be subject to the Act's voidable transaction provisions.
Finally, the DCT said that its interpretation of the Act is consistent with the objects of Pt 5.3A of the Act (to maximise the chances of the Company continuing in existence or, failing this, ensuring a better return for a company's creditors and members).

Findings

The Court found that the words "by, or under the authority of" require more than mere contemplation by a DOCA that payments be made.

With respect to the Company's obligation to comply with taxation laws under the DOCA, the Court observed that this responsibility rested with the Company and its director. The terms of the DOCA did not empower the deed administrators to conduct managerial affairs of the Company, such as making of the Payments.

The Court rejected the DCT's argument as to the policy considerations behind the introduction of the "by, or under the authority of" limitation, preferring to rely on the natural and ordinary meaning of the legislation rather than extrinsic materials.

Consequently, the fact that the Payments were made by the director meant that the Payments were not made "by, or under the authority" of the Applicants (acting in their capacity as deed administrators).

The Payments were therefore voidable unfair preferences.

Takeaways

This case confirms that the long reach of the preference payment claw-back provisions can extend to unsecured creditors who receive payments from a company subject to a DOCA, even where:

the transactions are authorised by a DOCA; and
the deed administrators are signatories.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.