Section 254 of the Income Tax Assessment Act 1936 sets out the circumstances when a 'trustee' (which is defined to include a liquidator and a receiver) must account to the Commissioner, out of the proceeds of sale, for any capital gains tax (CGT) liability that would result as a consequence of the sale. Justice Logan of the Federal Court of Australia¹ last Friday found that a liquidator does not have any obligation to pay under section 254 unless and until an assessment has been issued. A similar analysis would also apply to a receiver.

Introduction

Does the ATO have priority over secured creditors in a liquidation? Is a receiver required to account to the ATO for any tax payable out of funds received on the sale of an asset before accounting to the secured creditor? Are receivers and liquidators personally liable for the tax payable from funds received by them? Can receivers and liquidators avoid such personal liability by distributing funds received to creditors before a tax assessment arises? These issues were at the centre of a Federal Court judgment handed down on 21 February 2014.

First Equilibrium Pty Limited v Bluestone Property Services Pty Limited (in liq) [2013] FC AFC 108

An appeal from the decision of Bluestone Property Services Pty Ltd (in liq) v First Equilibrium Pty Ltd [2013] FCA 876.

On 21 February 2014 the Federal Court handed down its decision in Australian Building Systems Pty Ltd (in liq) v Commissioner of Taxation [2014] FCA 116  with the result that liquidators and receivers and managers cannot be held personally liable for any CGT liability subsequently assessed as due (where funds are remitted in the ordinary course and to secured creditors before the Commissioner of Taxation issues the assessment). 

The Implications of the Willmott Growers Decision

On 4 December 2013 the High Court handed down its decision in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed (In Liquidation)) [2013] HCA 51 (Willmott Growers case), clarifying the scope of a liquidator’s statutory power of disclaimer.

The recent Federal Court decision of ASIC & Franklin & Ors [2014] FCA 68 represents, respectfully, a noteworthy exercise by the Court in applying the law in a commercial common sense manner.

Justice Davies was asked to consider ASIC’s application for disqualification of the Liquidators of Walton Construction Pty Ltd (in liq) and Walton Construction (Qld) Pty Ltd (in liq) (the Companies). The Liquidators were appointed the Administrators of the company having been referred to the directors of the Companies by Mawson Group.

In summary

The recent case of Australian Securities and Investment Commission (ASIC) v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq) [2014] FCA 68 involved an action brought by the ASIC in order to remove the liquidators from the companies based upon a lack of independence and a breach of the Corporations Act 2001 (Cth) (Act) through an alleged deficient Declaration of Relevant Relationships (DIRRI).

It goes without saying that it is important for an insolvency practitioner to be independent and to be seen to be independent when accepting an appointment or continuing to act in an existing appointment. The recent Federal Court decision of ASIC v Franklin [2014] FCA 68 provides some welcome guidance on what this means in practice and also on the contents of a declaration of independence, relevant relationships and indemnities (commonly known as a “DIRRI”).

FACTS

The two year transitional period under the Personal Property Securities Act 2009 (PPSA) ends on 31 January 2014.  After this date, any remaining transitional security interests (TSIs) that have not been registered on the Personal Property Securities Register (PPSR) will no longer have their pre-PPSA priority, which could result in a secured party losing priority to other secured creditors or losing its interest in the secured property altogether if the grantor becomes bankrupt (if an individual) or is placed into administration or liquidation (if a company).

Two days before Christmas, the Supreme Court of New South Wales delivered a bonus for the general unsecured creditors of the collapsed discount giant Retail Adventures, and confirmed the requirements for deeds of company arrangement.

Deeds of Company Arrangement