“Related parties par excellence – company controlled by a wife on the one hand and the husband on the other”

When you are employed by your spouse’s company, and you attempt to resist bankruptcy based on your remuneration and support from that company, things can get difficult.

Mr Herbert sought a review of a sequestration order made by a registrar on 31 May 2023 on the ground he was solvent. Justice Logan of the Federal Court found his evidence was “rather thin on both the asset and debit sides of the ledger”, and in fact found that he was “hopelessly insolvent”.  

Herbert owed debts of over $390,000, including moneys owing under personal guarantees to Herbert Group Holdings Pty Ltd (in liq), of which he had been a director, which the Judge described as “apparently and spectacularly insolvent”.

He worked for Bid Collective, a company controlled by his wife, Ms Webb. He was paid expenses, “as well as amounts of cash. It is uncertain as to whether PAYG deductions are made”.

Mr Herbert claimed he had access to a $300,000 loan facility from Bid Collective, but the source of the funds for provision of this facility was “notably vague”, with “no documents whatsoever” and Ms Webb “had difficulty even recalling the name of the entity which was to provide the funds”.   In light of such “shadowy evidence”, Logan J had “no confidence that funds are available at all to Bid Collective for on-lending pursuant to the facility agreement”.

Herbert personally had not lodged a tax return since 2019, nor had Bid Collective for the 2021 and 2022 financial years. “Its compliance with its business activity statement lodgement obligations and related remission of any goods and services tax or other amounts owed to the Tax Office is, to say the least, moot”.

An uneasy feeling and deeply concerning issues

The Judge said he

“was left with a most uneasy feeling indeed upon hearing the evidence, or rather lack thereof, of adherence to obligations with the Tax Office that there may be an episode of history repeating itself with Bid Collective when I looked to the list of unsecured creditors … in respect of Herbert Group”.

Justice Logan found a number of issues “deeply concerning”: the absence of affirmative evidence as to tax compliance; the inaccuracy when one came to detail in oral evidence as to the nature of his payment by Bid Collective – a “very loose form of remuneration”; and the absence of any documentation at all, be they payslips or PAYG summaries, in respect of payments made to Mr Herbert.

Even conceding “that great informality can attend the operation of private companies”, there is a

“certain minimum one might nonetheless expect … that there is, however informal arrangements may be, compliance with tax obligations as between an apparent employee and the apparent employer. Neither Mr Herbert nor Ms Webb offered any such evidence, and they were the two persons peculiarly placed so to do”.

See Sherrin Rentals Pty Ltd, in the matter of Herbert v Herbert [2023] FCA 1323 (fedcourt.gov.au)

The judgment is instructive on a number of issues and will be of interest to many. 

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