Brisbane man cops jail time for $1.2M tax fraud
A 51-year-old Brisbane man has been sentenced to 7 years in prison and ordered to pay $1.2 million in reparations after he was convicted of fraudulently obtaining and attempting to obtain more than $1.2 million from the ATO.
On 22 March 2019, Stephen Mungomery appeared in the Brisbane District Court which heard that between March 2009 and October 2012, he lodged 46 Business Activity Statements (BAS) on behalf of his wife’s business, Gourmet Providores. In doing so, Mr Mungomery included expenses incurred by his sole trader entity Epicure Consulting and Training Solutions.
In attempting to substantiate his claims, Mr Montgomery produced 24 invoices issued by Epicure Consulting. The invoices accounted for 92% of all expenditure and totalled $13,767,466 in sales - including $5 million for website development and $2.6 million for franchise development.
However, those invoices bore no commercial reality and were never actually paid. In fact, the court heard that the initial Gourmet Providores website was actually created by another company for $7,885. The franchise development claims were also held to be fraudulent.
Mr Mungomery was subsequently jailed for 7 years and ordered to repay the money to the ATO.
ATO Assistant Commissioner Peter Vujanic asserted that this case signals a warning to all Australian’s that those caught breaking the law will be held accountable, even if it means pursuing an action in the criminal justice system.
Progressive Reforms – Recent developments in Australian directors’ liability
Until recently, Australia had some of the strictest insolvent trading laws in the world. Those laws were designed to lift the corporate veil, so that those in control of a corporation could be held liable for debts incurred while the corporation is unable to pay its debts as and when they are due. Section 588G of the Corporations Act 2001 imposes a duty on a director to prevent insolvent trading. It is designed to act as a deterrence on directors incurring debts when the corporation is insolvent. It imposes personal liability and, in severe cases, there are criminal sanctions.
While this act still applies, in 2015 the Australian Productivity Commission recommended reforms to Australia’s corporate insolvency regime, designed to enable restructuring of economically viable companies with less emphasis on punishing for financial failure.
The recommendations of the commission were to restrict formal company restructuring procedures to those businesses that were capable of being economically viable in the future. They also recommended the introduction of a safe harbour defence to allow directors to explore early restructuring options without liability for insolvent trading, and a restriction on the enforcement of Ipso facto rights in certain circumstances.
These changes have now been legislated and have commenced operation. One of the main reasons for their recommendation and implementation was empirical data suggesting that insolvent trading cases were not so extensive, with those cases that do proceed to trial, often weighted heavily in favour of the liquidator plaintiff as against the defendant director.
Following corporate failure, directors are often penniless and pursuing them is not economic. It is therefore not unsurprising to find that reported cases of insolvent trading are not extensive in the more than 40 years since Australia has had insolvent trading laws, in one form or another.
The commission sought to address the tension between the desirability for strong insolvent trading protection on the one hand and encouraging a business restructure while the corporation is in financial distress on the other.
Safe harbour reforms
One of the ways they have achieved this is via the implementation of safe harbour reforms. The object of the reforms is to encourage directors to pursue restructuring opportunities that will deliver a better outcome to key stakeholders.
A safe harbour applies from the time the directors, who suspect insolvency, start to develop and implement a course of action that is reasonably likely to lead to a better outcome for the corporation than immediate administration or liquidation. It also operates as an exception to the insolvent trading provisions of the Corporations Act 2001, providing directors protection from any personal liability for debts that are incurred directly or indirectly in connection with the course of action.
Directors can still be liable for insolvent trading if they continue to incur debts while the corporation is insolvent, but safe harbour, if implemented correctly, can provide a defence to insolvent trading, thereby encouraging restructure and turnaround solutions as opposed to liquidation and personal liability.
Safe harbour rules require directors to take an active role in the restructure, while acting honestly and genuinely. They must also use up-to-date financial information to assess the likely outcome of restructure and comply with obligations to pay employee entitlements when they fall due. Meeting all of the company’s taxation reporting obligations, while properly maintaining books and records is also a requirement.
Under safe harbour rules, directors must engage with key stakeholders to develop and implement the restructuring plan. Once it becomes clear that a corporation is not viable, the protection of safe harbour will cease. Protections are not absolute and will require extensive advice and planning as well as consultation with key stakeholders. Their object is to encourage a restructure if it is reasonably likely to lead to a better outcome for the corporation.
Safe harbour does not appear to protect against other breaches of the Corporations Act 2001 and a liquidator may well still be entitled to pursue a creditor for an unfair preference, i.e. where the creditor is paid when the corporation is insolvent and the creditor receives more than they would if the corporation was wound up.
Ipso facto reforms
These reforms introduce a stay on parties being able to enforce rights against a corporation which goes into administration, has a receiver appointed or enters into a scheme of arrangement. The aim of these reforms is to preserve the going concern value of a corporation by creating a moratorium on enforcement of certain clauses in commercial contracts.
Without these reforms, a restructure may be jeopardised because the going concern value of a corporation can be destroyed by enforcement action. The new provisions introduce a stay on enforcing contractual rights including termination rights where the corporation goes into administration, has a receiver appointed or enters into a scheme of arrangement.
The stay is expressed to be a restriction on the ability to enforce a right that arises by reason of an express provision of a contract, agreement or understanding. The court maintains an overriding discretion to lift a stay, if that is appropriate in the interests of justice.
Conclusion
The Safe Harbour and Ipso facto reforms are significant changes to the corporate insolvency and restructuring landscape in Australia. They promote or seek to promote maximising the opportunity for preserving a going concern to assist with a corporate restructure in appropriate circumstances. The reforms present a useful step towards dispelling the long-held view that insolvent trading in Australia is focused on punitive outcomes rather than promoting entrepreneurship.
This article is an excerpt from the IR Global Australasian Guide. A full copy of the publication can be accessed here.
UK case reignites debate on the correct extent of judicial intervention
A recent decision in the United Kingdom has shed light on the topical issue surrounding the proper extent of judicial intervention. The case of Serafin v Malkiewicz & Ors [2019] EWCA Civ 852 ensued after Mr Serafin appealed an earlier decision on a number of grounds, including that the trial judge had exercised unfair judicial treatment against him.
Mr Serafin was a Polish immigrant who relocated to London where he subsequently engaged in a number of small business ventures, including a food business, which he launched in 2008. In 2011, a bankruptcy order was issued in relation to that business, with the Official Receiver finding Mr Serafin had engaged in misconduct by disposing of £123,743 whilst insolvent. As a result, Mr Serafin was made subject to a five-year Bankruptcy Restrictions Undertaking (BRU) in 2012.
In October 2014, Mr Serafin was the subject of an article published in Nowy Czas, a magazine popular among London’s Polish community. The article was entitled ‘Bankruptcy Need Not Be Painful’ and Mr Serafin contended that it contained serious defamatory allegations about him that amounted to a character assassination. He subsequently brought an action against the magazine’s editor and co-publishers, complaining of 14 different defamatory allegations.
The matter was heard over a 7-day period, after which Justice Jay found that many of the allegations were in fact ‘seriously defamatory’. Despite this, his Honour dismissed the claim in its entirety after finding some of the allegations to be untrue. Mr Serafin subsequently appealed the decision on five grounds, including that the trial judge had shown him ‘unfair judicial treatment’.
On appeal, counsel for Mr Serafin asserted that the judge’s interventions were accusatory, with the judge acting as an advocate for the defendant’s case rather than a neutral umpire. Mr Serafin also argued that the judge ought to have considered that there was an inherent risk of unfairness on the basis that he was an unrepresented litigant who was not legally qualified and did not have English as a first language, whilst his opponent was a very experienced silk.
In doing so, Mr Serafin tendered evidence that Justice Jay had formed a prejudicially adverse view of his evidence and character. The evidence included comments made by his Honour that Mr Serafin was “fundamentally untrustworthy” and warning Mr Serafin that “you will lose” and “I will hold things against you.” His Honour also told Mr Serafin “your reputation is already starting to fall apart, because you are a liar and you do treat women in a frankly disgraceful way.”
Furthermore, when counsel for the defendants suggested that the judge ask Mr Serafin which parts of the article he maintained were false, Justice Jay quipped, “I would not even bother, Mr Metzer, I think we have got to assume every point is lies.”.
On appeal, the court held that it was wrong for Justice Jay to “descend into the arena and give the impression of acting as an advocate”. In doing so, it concluded that it was “immediately apparent…that the Judge’s interventions during the Claimant’s evidence were highly unusual and troubling” and that his Honour “used language which was threatening, overbearing, and frankly, bullying”.
In deliberating this ground, the court considered Michel, which notes that not all departures from good practice render a trial unfair. However, having regard to the ‘nature, tenor and frequency of the Judge’s interventions’, the court concluded that an appeal was warranted.
In allowing the appeal, the court declared that Justice Jay “not only seriously transgressed the core principle that a judge remains neutral during the evidence, but he also acted in a manner which was, at times, manifestly unfair and hostile to the Claimant”.
Ultimately, this case reinforces that the role of a judge is to determine the dispute of the parties impartially and that one should not engage in bullying or unnecessary intervention. Although a UK case, it reflects trends in the Australian legal system, with almost two thirds of Victorian barristers reported to have been bullied from the bench. The rising number of instances such as this certainly begs the question of whether Queensland ought to create a Judicial Commission as has been done in New South Wales.
The scope of judicial intervention is a complex topic, which requires an open debate.
Failure to Disclose Debt May Jeopardise Consent Order
A recent finding of the Full Court of the Family Court of Australia serves as a timely reminder that a failure to disclose an asset or debt in a consent order may result in orders being set aside, regardless of whether that asset or debt is in the name of an individual, or the name of an ex-partner.
In the matter of Trustee of the Bankrupt Estate of Hicks & Hicks and Anor [2018] FamCAFC 37, the court was required to determine whether an appeal should be allowed on the basis that the primary judge erred in dismissing an application to set aside consent orders.
Specifically, the case involved Mr and Mrs Hicks, a husband and wife who, during their marriage, had acquired a number of properties between them. Mr Hicks also engaged in a number of business ventures, including a commercial deal to secure a $560,000 investment by Mr S in an enterprise known as U Pty Ltd.
Following their divorce, the couple filed an Application for Consent Orders for property settlement, in which neither party disclosed any liability to Mr S or identified him as a person who may be entitled to become a party to the case - something the application required.
Consequently, the Trustee of the Bankrupt Estate sought to have the final consent orders set aside.
At first instance, Mrs Hicks asserted that although there was a miscarriage of justice, the consent orders should not be set aside. The primary judge found in favour of Mrs Hicks, concluding that the debt was not incurred for a matrimonial objective and thus ruling that she had no involvement in Mr Hicks debt to Mr S. His Honour also contended that the trustee of bankruptcy would find itself in no better position if the order were set aside.
At trial, the Trustee subsequently argued that the consent orders should be set aside. In doing so, the Trustee asserted that the parties to the consent orders had sought to defeat a creditor by not disclosing that Mr S was suing Mr Hicks for $606,000 or notifying Mr S of the orders they proposed.
Thus, the court concluded that the Trial Judge had not taken into account the likely outcome of the property settlement proceedings in the event that the orders were set aside. Ultimately, the court held that the debt of $606,000 was incurred during the marriage and the projects which were linked to the loan were intended to benefit the marriage. On these grounds, the court allowed the appeal, ordering the proceeding be partially remitted for rehearing on the basis that there was a miscarriage of justice pursuant to s79A(1)(a) of the Family Law Act 1975 (Cth).
Expert determination – does ‘according to law’ mean free from legal error?
A common form of alternative dispute resolution is to have a dispute decided by an expert. The advantages of this method are that it is usually faster and less expensive than taking your dispute to court. Another advantage is you can appoint an expert with specialist knowledge of the industry that a judge may not have.
One important question regarding this process is how accurate the expert has to be in applying. The general consensus is that unless the expert has legal training, their determination may not be a truly accurate representation of the law. A recent case in the New South Wales Supreme Court does however provide guidance on this issue.
The case of Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576 concerned a challenge to an expert determination of a building contract dispute. A clause in the contract provided that before proceeding to court or arbitration:
(i) Any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to an expert in accordance with, and subject to, The Institute of Arbitrators & Mediators Australia Expert Determination Rules.
A dispute arose and was duly referred to an expert who found in favour of the builder. This determination was then challenged by the landowner on the basis that the expert had made an error of law when making their determination. The landowner argued that under Rule 5.1 of Arbitrators & Mediators Australia Expert Determination Rules, the expert was obliged to reach a decision free from legal error.
Hammerschlag J rejected this argument. His Honour found that in the context of the Expert Determination Rules “… the words ‘according to law’ mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated”.
His Honour further commented that the landowners interpretation place an immense burden on experts and would be commercially inconvenient as “[i]ts acceptance would have the consequence that the Determination is, in effect, subject to appeal on any and every question of law determined or legal precept relied on by the Expert, which, if determined or seen differently, would lead to a different result”.
His Honour concluded by stating that the expert determination process is “… no more than a private contractual mechanism to which parties agree and which, as is dealt with above, does no more than create binding contractual obligations. It has no statutory backing as a process. It is not a process which resolves any dispute by the exercise of judicial, quasi-judicial, administrative, statutory or other power or jurisdiction.”
Ultimately, this decision highlights that the expert determination process is not judicial in nature and will therefore be unlikely to be held to the same standards as a Court or Tribunal. As the process is not deemed to be judicial, participants will generally not have any form of appeal from a determination unless this is provided for in their contract.
VSCA highlights the importance of distinguishing between debt and damages in debt recovery claims
In the matter of Yang v Finder Earth Pty Ltd [2019] VSCA 22, the Victorian Supreme Court of Appeal set aside a default judgement for recovery of an unpaid debt on the basis that the underlying claim was better characterised as one for damages. Ultimately, the case illustrates the importance of properly and clearly pleading a claim when seeking to recover a debt through litigation.
The case ensued after the parties entered into two agreements where the second respondent, Ms Luo, loaned Mr Yang two sums of money totalling $700,000. The terms of the agreements noted that the money was to be applied solely for the purpose of establishing a business. Relevantly, the business was established for the purpose of obtaining an investment-based migrant visa for Ms Luo and her family.
Pursuant to the terms of the agreement, Mr Yang guaranteed and indemnified Ms Luo for the money she lent and for ‘any further loss and damage she sustained’ in connection with the agreement. If the agreement was breached by Mr Yang, all funds lent to the company in advance were to be returned to Ms Luo.
Mr Yang was alleged to have misapplied both the loan money and business revenue for his own benefit, constituting a breach of the agreement. Proceedings were initiated in the County Court where Ms Luo pleaded on the following basis:
By reason of the conduct alleged, Luo has suffered loss and damage being:
(a) a loss of the $700,000; and
(b) exposure to creditors of Finder Earth for which she has provided personal guarantees and has or will need to compensate.
The relief sought by Luo was particularised in the following terms:
$700,000 owing to [Luo] under the Finder Earth Loan Agreement and LL Loan Agreement.
…
A declaration as to the validity of the Yang/Luo Guarantee and Indemnity and an order for such loss and damage owing pursuant to the Yang/Luo Guarantee and Indemnity.
Damages.
Mr Yang’s defence was struck out pursuant to rule 21.02 of the County Court Civil Procedure Rules 2008 (Vic). In the absence of a defence, Ms Luo entered default judgment for $700,000 plus interest and costs. Mr Yang applied to set aside the default judgment, arguing the claim was not for recovery of debt under the guarantee and indemnity but rather a claim for damages arising from Mr Yang’s alleged misapplication of the loan. The application was refused on the basis that Ms Luo’s pleading made it sufficiently clear the claim was for a fixed monetary sum. Mr Yang appealed.
The Court of Appeal allowed Mr Yang’s appeal agreeing that while the foundation of Ms Luo’s claim was the guarantee and indemnity, the money sought was the ‘loss and damage’ suffered as a result of misapplication of the loan. On this basis, Ms Luo was not entitled to enter judgment in the manner she did. The Court noted that had the pleadings mentioned a debt arising under the guarantee by reason of default under the loan agreement, their conclusion would have been different. However, this was not the case as ‘loss and damage’ had been sought instead.
Ultimately this case serves as a reminder to creditors that when seeking to recover a debt through the courts, it is crucial that the relief sought is properly and clearly expressed as a fixed sum owing and not as a recovery of damages suffered by reason of non-payment. If the claim is not properly pleaded, a judgement obtained will be open to scrutiny from higher courts.
Perth accountant sentenced to 4 years imprisonment for $250k tax fraud
A Perth accountant has been sentenced to 4 years imprisonment for tax fraud after he was convicted of both obtaining and attempting to obtain over $250,000 from his clients and the ATO.
On 21 February 2019, the Perth District Court heard that during his time as an accountant at Finkelstein Hickmott between May 2016 and July 2017, Shane Read lodged 21 of his client’s tax returns without authorisation and accessed four client’s Activity Statements.
Moreover, Mr Read sought to obtain further funds from the ATO via an unauthorised BAS lodgement containing false information, following which an ATO audit revealed that he had obtained financial advantage committing fraud in the name of unwitting clients. Relevantly, Mr Read was found to have altered bank account details to divert ATO refunds to his personal bank account without his client’s knowledge.
ATO Assistant Commissioner Tim Roach has welcomed the sentence, asserting that the ATO “…will continue to work with tax professionals to ensure the integrity of the system and to protect honest tax professionals and the community from these types of crimes.”
Full Federal Court clarifies tax obligations for Australian’s living and working abroad
When is a person living overseas no longer a resident for tax purposes? A recent decision of the Full Federal Court provides an interesting perspective but will the Tax Office accept the determination or apply for special leave to appeal the High Court for reconsideration – Watch this space.
In Harding v Commissioner of Taxation [2019] FCAFC 29, the Full Federal Court allowed an appeal by a taxpayer after he disputed the Court’s earlier determination that he was an Australian tax resident.
Mr Harding was an Australian citizen who had worked in the Middle East for over 15 years. In 2006, he returned to Australia to live with his wife and children, but later relocated to Bahrain in 2009 to pursue a work opportunity in Saudi Arabia.
The ATO sought to have Mr Harding pay Australian income tax in respect of the salary paid to him for the 2011 financial year. In doing so, the ATO asserted that despite being employed in Saudi Arabia, Mr Harding was an Australian tax resident pursuant to section 6 of the Income Tax Assessment Act 1936 (Cth).
Relevantly, section 6 provides that a ‘resident of Australia’ is a person who ‘resides in Australia’ (the resides test) and includes persons ‘whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside of Australia’ (the permanent place test).
In assessing his taxpayer status, the court heard that in Bahrain, Mr Harding leased a fully furnished 2-bedroom apartment. During that time Mr Harding’s wife and children remained in Australia and he regularly returned to visit them. It was his intention that his family would later relocate to join him, upon which he would purchase a larger property to serve as the family home. However, in 2011 his marriage broke down and so Mr Harding instead moved to a smaller apartment in the same building.
The resides test
At both instances the court was satisfied that Mr Harding did not reside in Australia, noting that Mr Harding did not intend to return to Australia after his departure in 2009 and that despite having a place to stay in Australia, Mr Harding did not treat this place as his home.
In doing so, the court rejected the Commissioner’s contention that Mr Harding’s Australian citizenship, bank accounts and his family’s retention of his Australian property, were sufficient to establish a finding that he considered Australia to be his home.
The permanent place test
At first instance the primary judge found in favour of the ATO, ruling that Mr Harding did not satisfy the ‘permanent place of abode test’ as the rented Bahrain apartment was only temporary.
However, on appeal the full court was satisfied that the primary judge had applied a ‘too narrow conception’ of what constituted a ‘permanent place of abode outside of Australia’.
In doing so, the court held that the temporary nature of the accommodation did not render it incapable of proving ‘permanent’. That is, the court held that this test should not be determined by reference to whether a person is permanently located at a specific house, flat or dwelling, but rather ‘permanent place’ requires the identification of a country or state in which the person is living permanently.
Here, Justice Logan noted that “… to focus on whether a particular tree (temporary accommodation) is present runs the risk of losing sight of the fact that this tree forms part of a wider wood (permanent place of abode outside of Australia).”
Ultimately, the court was satisfied that Mr Harding lived in Bahrain in 2011, because, among other factors, he had:
- Enrolled his youngest son in a Bahrain school for the 2011 year;
- Purchased a second car for his wife to drive upon relocating to Bahrain;
- Attempted on several occasions to convince his wife to join him in Bahrain as originally planned; and
- Expressed no intention of leaving his Saudi Arabian based employment.
This decision comes in the wake of the Government’s impending consideration of the Board of Taxation’s review of Australian residency rules for individuals. It signals a positive outcome for all Australian’s living and working abroad, namely that they will not automatically be treated as Australian tax residents. However, it will be interesting to see if the ATO seeks special leave to appeal this decision to the High Court.
ASIC charges director and pre-insolvency advisers with dealing with proceeds of crime
Following an investigation into the affairs of Cap Coast Telecoms Pty Ltd, ASIC has charged a company director and two pre-insolvency advisers with dealing with proceeds of crime, alleging the trio were complicit in the removal of almost $750 000 in company funds.
On 1 March 2019, the trio appeared in the Brisbane Magistrates Court which heard that Richard Ludwig, former Director of Cap Coast Telecoms, had garnered advice from Stephen O’Neill and John Narramore of SME’s R Us following a dispute with a creditor.
ASIC alleged that between October 2014 and January 2015, the duo aided Ludwig in the removal of $743,050 of company funds to accounts in their control before the company was wound up in liquidation.
The majority of the money was then forwarded to Ludwig, with duo retaining a portion.
Mr Ludwig has subsequently been charged with ten counts of breaching his director duties pursuant to the Corporations Act 2001 (Cth) and faces a maximum penalty of 2000 penalty units and/or five years imprisonment.
All three men are charged with one count of dealing in the proceeds of crime worth $100,000 or more under to the Criminal Code 1995 (Cth), for which they face up to 1,200 penalty units and/or 20 years imprisonment.
The trio were bailed and the matter is now due to return to the Brisbane Magistrates Court on 3 May 2019.
Worried you’re trading insolvent? Here’s what to look out for
In 2003, the Victorian Supreme Court considered the case of ASIC v Plymin, Elliot & Harrison [2003] VSC 123, in which it was found that a number of companies had traded whilst insolvent. As a result, the associated directors were liable to compensate the creditors $1.4 million for debts incurred in the insolvent period. The case has subsequently been relied upon to identify instances of corporate insolvency, after the court outlined 14 factors likely to indicate insolvent trading. These indicators include:
- Continuing Losses
- Liquidity ratios below 1
- Overdue Commonwealth and State taxes
- Poor relationship with present bank, including inability to borrow further funds
- No access to alternative finance
- Inability to raise further equity capital
- Suppliers placing company on COD, or otherwise demanding special payments before resuming
- Creditors unpaid outside trading terms
- Issuing of post-dated cheques
- Dishonoured cheques
- Special arrangements with selected creditors
- Solicitors' letter, summonses, judgements or warrants issued against the company
- Payments to creditors of rounded sums which are not reconcilable to specific invoices
- Inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts
Although this has now become the standard list of indicators used by liquidators to justify assertions of insolvency, it is important to remember that they remain indicators only. As such, a court will ultimately make a finding of insolvency ‘on the facts’. Accordingly, the indicators alone cannot be relied upon as a fail-safe template and liquidators may need to provide further evidence to support an allegation of insolvent trading.
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If you have answered yes to any of the above indicator's your company may be insolvent. Please do not hesitate to contact me so that we can work together to identify your legal position, safeguard the longevity of your business and recover debt from your debtors.
