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Good try ATO, better preference next time

CaseFlash 09 March 2012

On 29 February 2012, the Federal Court allowed the liquidators of Mortlake Hire Pty Limited (“Mortlake”) in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152 [1] to recover payments made to Commissioner of Taxation (“Commissioner”) on the basis that the payments were unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth) (“Act”).


Mortlake made two payments totalling $70,000 to the Commissioner to reduce its Running Balance Account.

The Commissioner then reallocated the payments made into Mortlake’s Running Balance Account to its Superannuation Guarantee Account in reduction of superannuation guarantee charges owed by Mortlake.

Mortlake subsequently entered into voluntary administration and then liquidation. Mortlake’s liquidators sought to recover the payments made to the Commissioner as unfair preferences. Even if they were successful however, the liquidators did not expect to be able to make any distribution to creditors.

Were the payments to the Commissioner unfair preferences?

S588FA states relevantly that a transaction with a creditor is an unfair preference if, and only if, the transaction results in the creditor receiving more from the company than would be received by the creditor if the creditor was required to prove for a debt in the winding up of the company.

One of the arguments raised by the Commissioner was that the payments were not unfair preferences because they were ultimately applied in reduction of Mortlake’s Superannuation Guarantee Account. Importantly, section 556(1)(e) of the Act affords claims for outstanding superannuation guarantee charges (‘SGC’) priority over other unsecured claims (such as, for example, any claim by the Commissioner under the Running Balance Account). The Commissioner submitted that in a hypothetical winding up of Mortlake conducted as at the date of the payments, the Commissioner would already be entitled to priority over all other unsecured creditors because the payments could now be considered to be in reduction of Mortlake’s SGC debt, thus triggering the operation of s556(1)(e).

On this argument, Nicholas J found that:

  1. The actual, not hypothetical, winding up of Mortlake is the yardstick by which a preference is to be judged. As the liquidation of Mortlake would not produce any dividend, the Commissioner had inescapably received more than he would should he now prove for his debt of $70,000. Therefore, he had received an unfair preference.
  2. In light of the above finding, it was unnecessary to consider whether or not the Commissioner would have been entitled to the claimed s556(1)(e) priority.


One point of interest in Nicholas J’s decision is the position taken by the Commissioner in relation to the payments. Through his own internal arrangements – by reversing Mortlake’s $70,000 payments to its Running Balance Account and reallocating the payments to its SGC account – the Commissioner effectively sought to secure for himself a higher priority in Mortlake’s winding-up. It should be a matter of concern for unsecured creditors that the Commissioner may effectively seek to secure a priority over his claims in the company’s winding-up by an internal allocation of payments made in reduction of a Running Balance Account - or presumably GST, or PAYG - to an SGC account.

Kirsten Farmer, Partner

Guy Moloney, Senior Associate

CaseFlash 09 March 2012
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