For many years the definition of 'insolvency' has been discussed by the judiciary, the Parliament and by the profession. The starting point is that both the Bankruptcy Act and the Corporations Act define 'solvent' stating that "A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable." 1 The following subsection plainly concludes "A person who is not solvent is insolvent." Such legislative treatment has not stopped litigation and judicial interpretation of the concept though. More recently, the interpretation of certain tax debts seems to colour these definitions.
The Australian courts have had a number of opportunities over the last 120 years since Federation to consider insolvency and its meaning. In 1907 in the Bank of Australasia v Hall the High Court specifically considered the words "as they become due." A century later in Hall v Poolman (2007) the NSW Supreme Court in considering when and whether the company had become insolvent, found that the company was insolvent after the issue of the tax assessments which was known by the company's directors, who had failed to prevent the company continuing to incur debts during its insolvency. It was clear from that case that genuinely disputed tax debts are still debts and should be taken into account in determining the company's solvency.
In the case of Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq)  FCA 319 Gleeson J in the Federal Court detailed an extensive coverage of this topic under subheadings of the "legal principles" and "when a debt is incurred" and then moved to "when tax debts are incurred." At this point in the judgment Gleeson J considers the Tax Administration Act 1953 (Cth).
Section 255-15 of Schedule 1 to the Tax Administration Act 1953 (Cth) ("TAA") provides that (1) The Commissioner may, having regard to the circumstances of your particular case, permit you to pay an amount of a tax-related liability by instalments under an arrangement between you and the Commissioner (whether or not the liability has already arisen). Subsection (2) then provides that "The arrangement does not vary the time at which the amount is due and payable." In a related section, 255-10(1) provides that "The Commissioner may, having regard to the circumstances of your particular case, defer the time at which an amount of a tax-related liability is, or would become, due and payable by you (whether or not the liability has already arisen). If the Commissioner does so, that time is varied accordingly."
Gleeson J in Smith v Bone based on s255-15 found that none of the numerous payment arrangements that had been made between the company and the ATO had changed the existing tax debt from being due and payable. The debt never ceased to be 'due and payable' and this was crucial to the outcome for the directors who were facing insolvent trading claims. Whilst the defence tried to argue that surely if the company and its directors had a payment arrangement and the time for payment under that arrangement had not arrived then the liquidator should be stopped from claiming the company was insolvent. Gleeson J rejected this on the grounds that no conduct on the part of the Commissioner could operate as an estoppel against the operation of the TAA and that no estoppel is effective against the operation of a statute like the TAA. As Jackson J has since commented in Commissioner of Taxation v Croft & Anor  QSC 190 "[T]here is also a strong body of case law dealing with estoppels raised against a liability for a sum under a revenue statute." 2 They favour the ATO.
Generally, in determining whether a corporation is insolvent for the purposes of s95A of the Corporations Act regard is had to 'commercial realities' and the insolvency outcome is to be determined as a question of fact. 3 It is therefore not surprising that persons affected by the position as outlined in Smith v Bone would wish to have this 'commercial reality' considered in light of payment arrangements struck with the ATO. However, it also appears that the courts now are solid that if the legislature clearly says that a tax debt is payable at a certain time, neither the Court nor a company director can disregard that statutory imperative by an appeal to commercial reality. 4
In 2020 in the case of Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy  FCAFC 5 the Full Court of the Federal Court it was argued that "due and payable" in s 255-15 has a narrow meaning which does not accord with the manner in which that expression is used in assessing insolvency under the Corporations Act. This argument failed. The Full Court said that their view s255-15 does not vary the time at which a liability to the Commissioner is due and payable. 5 The Full Court addressed the relationship of s95A and the TAA's s255-15 by stating:
 The description of debts as "due and payable" is used widely in the TA Act [TAA] in the context of when a liability to pay tax accrues and when payment of that liability is due. We agree with the primary judge that the term "due and payable" is well known... Nothing in s95 of the Corporations Act qualifies the meaning of the term. As is well recognised, part of the exercise required by s95A in assessing solvency is a consideration of the terms of each relevant debt and whether it is due and payable at the relevant time the subject of consideration. Part of that consideration includes ascertaining and reviewing the contractual terms relevant to any obligation that arises under contract and a consideration of the relevant statutory terms where, as here, an obligation arises under statute. Section 255-15 clearly informs the question of when a liability is due and payable where there is a payment arrangement, just as s 255-10 informs the question of when a liability is due and payable where there has been a deferral granted by the Commissioner. There is nothing in that process that requires or suggests that "due and payable" in s 255-15, or indeed Subdivision 255-B of the TA Act [TAA], has any particular or confined meaning.
The Full Court expressed that directors may find it 'incongruous' 6 that having secured an arrangement they remain obliged to take the full liability into account when considering insolvency at any given time. However, it seems the 'nature' of the statutory tax debt, whereby the outcome protects the interest of the Revenue, must prevail.
Additionally, in this 2020 case it was argued that it was possible to view the effect of a s 255-15 arrangement as a waiver on the part of the Commissioner to pay a tax debt. The Full Court rejected this proposition. 7
There is an ATO Practice Statement Law Administration PS LA 2011/14 which boldly informs taxpayers that, relevantly, an arrangement under s 255-15 of Schedule 1 does not vary the time at which the amount is due and payable. 8
To summarise, it appears that the ATO has been able to manipulate the meaning of insolvency using the TAA whereby the present situation is that the definitional requirement that a debt be "due and payable" is expected of all users of the Corporations Act and Bankruptcy Act apart from certain ATO debts. Users of the definition such as those interested in proving of insolvency at a particular time in a company's life or those preparing an insolvency report must now take great care if an assessment of insolvency is being made so as to factor in that ATO debt despite a payment arrangement must be considered to be "due and payable."
In our experience, correspondence from the ATO agreeing to payment of tax liabilities by instalment usually does not state whether the agreement is under section 255-10 or section 255-15. If it is the latter, it will not help the directors in arguing that the company is now solvent. The take-away is that if the company is seeking an arrangement with the ATO, it should be sought under section 255-10, rather than section 255-15. In the end, however, it will be at the Commissioner's discretion whether the ATO agrees to an arrangement, and if so, under what section of the TAA
1 Corporations Act 2001 (Cth) s95A(1), (2); Bankruptcy Act 1966 (Cth) s5(2), (3).
2 Commissioner of Taxation v Croft & Anor  QSC 190  citing Federal Commissioner of Taxation v Wade  HCA 66; (1951) 84 CLR 105, 117; Chamberlain v Deputy Commissioner of Taxation  HCA 21; (1987-88) 164 CLR 502, 510; Federal Commissioner of Taxation v ANZ Savings Bank Ltd  HCA 58; (1994) 181 CLR 466, 479; Commissioner of Taxation v Ryan  HCA 4; (2000) 201 CLR 109, 124 ; Commissioner of Stamp Duties (Qld) v Agenti Architects Pty Ltd  QCA 265, ; Smith v Bone  FCA 319; (2015) 104 ACSR 528, 537-538 at .
3 ASIC v Edwards  NSWSC 831; Hall v Poolman  NSWSC 1330 at ; Lewis v Doran  NSWSC 608 at .
4 Hall v Poolman  NSWSC 1330 .
5 Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy  FCAFC 5 .
6 Ibid .
7 The argument was based on an earlier decision of Edelman J in Hussain v CSR Building Products Ltd  FCA 392; (2016) 246 FCR 62.
8 Australian Taxation Office, Practice Statement Law Administration (PS LA 2011/14) Annexure B para 54.Published 11 April 2019.
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