Court suspends the operation of ATO Garnishee during administration

Prior to administration, the ATO issued a garnishee notice (Notice) to the invoice financier of Hudson Global Resources (Aust) (Hudson) requiring 20% of all drawdowns to be remitted to the ATO in satisfaction of overdue pre- appointment tax debts.

The administrators wished to trade Hudson’s recruitment and labour hire business which employed more than 1,500 employees and contractors with a view to preserving the value of the Company’s business so that a restructuring proposal or a sale of the business as a going concern concluded. However, as 20% of turnover far exceeded Hudson’s gross profit margin, the Administrators were faced with the real possibility of incurring significant personal liabilities to continue trading until the Second Meeting whilst the Notice remained in place.

The ATO declined the administrators’ request to withdraw the Notice. The Administrators urgently applied for relief from the Notice pursuant to Section 440B, 441D or 447A of the Corporations Act. The ATO argued it did not have a security interest and had not taken steps to “enforce” the Notice accordingly Section 440B and 441D did not apply and further that the application was not a permitted use of s447A as it interfered with the operation of a Commonwealth taxation power.

The Court found that the Notice did create a security interest but agreed that ATO had not taken steps to enforce the Notice (it did not need to take steps as the invoice financier could face criminal penalties for not complying). However, the Court found the effect of the Notice is to “syphon to the benefit of the ATO (who is otherwise an unsecured creditor with no particular priority under s556) property that would otherwise be available to the administrators” and therefore agreed that s447A could be applied as it was more likely that the objects of Part 5.3A (to maximise the chances of Hudson continuing in existence, or to provide a better return to creditors) could be achieved. 

The full reasons can be found here