In a recent case,[1] C88 Project Pty Ltd, a liquidator was ordered by the Court to return tax moneys of $364,267 paid by the ATO to the company in liquidation by mistake. Various issues were raised, including as to the law of mistake, constructive trusts and the particular tax law provisions. [2]
The liquidator had properly applied to the Court under s 90-15 IPSC under which the orders were made that he would be justified in paying that amount to the ATO, and that he would not be justified in not doing so.
The rule in ex parte James
In other cases where liquidators and bankruptcy trustees [3] and wrongly paid tax have been involved, the 1874 rule in ex parte James [4] has been applied by the court to direct the insolvency practitioner’s response. I covered many of these cases in The insolvency rule in ex parte James – another in a series of cases ‘dancing on pinheads’ – Murrays Legal.
The rule is as stated in what remains as the main English case, Lehman Bros Australia v MacNamara that
… the court will not permit its officers to act in a way which, although lawful and in accordance with enforceable rights, does not accord with the standards which right-thinking people or, as it may be put, society would think should govern the conduct of the court or its officers“.[5]
Tax examples are a mistakenly paid GST refund of NZ$169,000, in Burns v Commissioner of Inland Revenue;[6]and a tax refund of over £5 million in Revenue and Customs v Sanders.[7]
Unfairness
The rule in ex parte James has more often been applied, and explained, in England. Lehman Bros v MacNamara itself determined that the test is one of unfairness rather than unconscionability; that the standard is objective, not based on the particular conduct of the practitioner; and that the principle is not confined to cases of money paid under a mistake of law but is a general principle applicable to any acts of insolvency practitioners.
What is ultimately “fair” in any case can be difficult to assess. Many would say that elements of insolvency law are unfair, for example creditors who are pursued for “unfair” preferences.
[In that respect, an English judge refused a trustee’s preference claim in a case involving a “tragic … father and son dispute [which] led to a claim against a stepdaughter” for recovery of money, which would have involved “the sale of the family home of a mother without any other significant assets when she received the Payment as a commercial debt payment without knowledge …”. The Court found that despite the policy purpose of preference recoveries, “the right-thinking person representing the current view of society would not consider it right to exercise legal rights resulting from a preference in this case”.[8] ].
Note also that the English cases refer to the standards of the “right thinking person”; some Australian law defers to “the person on the Bondi bus”.[9]
AFSA guidance
Much will depend on the facts of each case and as AFSA says, if an issue does arise where the rule might apply
“unless the answer is obvious or all the creditors agree, the trustee would be wise to take legal advice or seek the direction of the court under section 90-15 of the Schedule”.[10]
That is wise advice but might depend on funds available and the amount involved. In most cases, it is the trustee or liquidator who seeks the court’s direction, even if it means that funds in the estate, including for remuneration, might be reduced. In many cases the application is opposed by parties who would seek the strict law to be applied.
There are necessarily cases where the rule is found not to apply. AFSA refers to the decision in Re Houston,[11] where the trustees sought the Court’s directions as to an in specie distribution of property notwithstanding the consequences of leaving the bankrupt with a post-bankruptcy capital gains tax liability, which he may have been unable to meet; (as CGT liability was accepted at that time).[12]
C88 Project
In C88 Project, the liquidator properly applied to the Court under s 90-15 with an outcome probably comparable to directions sought under the rule in ex parte James.
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[1] In the matter of C88 Project Pty Ltd (in liq) (controller appointed) [2024] NSWSC 999 (12 August 2024) (austlii.edu.au),
[2] Including that, in accord with Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589, a constructive trust arose over the moneys paid by mistake; and that section s 8AAZN of the Taxation Administration Act 1953 (Cth) applied, by which an “administrative overpayment” under taxation laws merely becomes a debt due to the Commonwealth.
[3] It applies to the Official Trustee: Official Trustee in Bankruptcy v Kent (No 2) [2023] FCA 1396 at [42].
[4] (1874) LR 9 Ch App 609
[5] Lehman Bros Australia v MacNamara [2020] EWHC Civ 321; [2021] Ch 1
[6] [2011] NZHC 1363; upheld on appeal Strategic Finance Ltd (in rec and in liq) v Bridgman [2013] NZCA 357; [2013] 3 NZLR 650, at [107]-[120].
[7] Revenue and Customs v Sanders [2021] EWHC 1843
[8] Fowlds (A Bankrupt), Re [2020] EWHC 1200 (Ch) (22 May 2020) (bailii.org)
[9] At least as Justice Young once put it: Presbyterian Church Trust v Scots Church Development [2007] NSWSC 676.
[10] See AFSA’s IGPD 14 – Proper performance of duties of a bankruptcy trustee.
[12] Federal Court Confirms IG Position on treatment of Capital Gains | Australian Financial Security Authority (afsa.gov.au)
