The High Court has silenced the furore relating to the Australian Taxation Office's (ATO) ability to recover debts from collapsed companies before other creditors.
On Thursday, five judges of the High Court overturned the decision made in Bruton Holdings by the Full Federal Court in March.
Explaining the history of the case, Clayton Utz partner David Cowling told Lawyers Weekly that when a company goes into liquidation, all unsecured creditors have to be treated equally but that for many years a special exception had existed for the ATO.
Crown debt took priority over other debts and the ATO had to be paid in full before other creditors received a cent, but this rule was abolished 10 years ago, Cowling said.
"The ATO has long had the power to garnishee debts which someone owes to a company. If a company owes tax to the ATO and someone owes money to the company, the ATO can require that debtor to pay the money to the ATO, rather than to the company. This is done by serving an s260-5 notice on the debtor," he said.
"In Bruton's case, the ATO served an s260-5 notice on a potential debtor after a company had gone into liquidation. If that notice was valid, it would require the debt to be paid over to the ATO, rather than to the liquidator. The Full Federal Court upheld the ATO's actions. This caused a furore, because it looked as though the ATO had managed to bring crown debt priority back from the dead."
This could have the consequence that the company's debtors paid the tax office directly, instead of the liquidator, who pays various entitlements - including employee wages and superannuation.
Cowling said the reality, however, was "somewhat different", with the ATO reportedly announcing that, despite its victory in the Federal Court, it would not use s260-5 notices after a company had gone into liquidation.
"The typical response to this announcement was 'That's what they say'. In addition, the Full Federal Court made it clear that its decision was strictly limited to the case that had been argued before it," he said.
"On appeal, the High Court overturned the Federal Court's decision, thus killing off any threat of a revival of crown debt priority."
Michael O'Neill, partner at Nash O'Neill Tomko Lawyers, which acted for Bruton Holdings, told The Australian that the High Court result would relieve uncertainty and anxiety among insolvency practitioners that the ATO could leapfrog other creditors by issuing the notice and that liquidators would be relieved.
- Sarah Sharples