In her article of 27 June 2024, our Rebecca Patel gave an overview of garnishee orders and how theywork. This article picks up on that background andshares our recent experiences with garnishees inboth corporate and personal insolvency.
Parties cannot issue a garnishee notice after an insolvency has commenced, with the statutory protection founded in sections 440B and 471B of the Corporations Act 2001 and section 58(3) of the Bankruptcy Act 1966, except with the leave of the Court and in accordance with such terms (if any) as the Court imposes. However, a Bankruptcy Trustee can issue a garnishee notice against the regulated debtor (bankrupt) in certain circumstances, principally to recover income contributions owing by the bankrupt and only with the approval of the Australian Financial Security Authority (AFSA). Certain parties can also rely upon already existing garnishee notices issued prior to an insolvency to collect on their debt after an insolvency has commenced.
Where the Australian Tax Office (ATO) has previously relied upon Director Penalty Notices as a lever to collect upon corporate tax debt (by claims against directors), they are also now more heavily relying upon garnishee notices to collect from companies’ bankers and customers. This is particularly disruptive for business especially when funds are held in the company bank account to meet a monthly salaries/wages bill, but the funds are not available due to an ATO garnishee. Think of it as the direct debit from the company account that the directors did not sign on for.
Where cashflow is the lifeblood of most business, the garnishee notice can derail the otherwise orderly flow of payments. To avoid that scenario, when there is financial distress, proprietors should seek to enter payment arrangements with the ATO and work steadfastly to honour those arrangements. Once breaches of payment plans occur, garnishee of funds by the ATO is common. Accordingly, please reach out to your local SV office to discuss any client situation where payment plan breaches are anticipated. The appointment of an administrator, liquidator or restructuring practitioner might better secure the company cashflow in the interests of employees and the wider creditor group.
Interestingly, garnishees in favour of the ATO (or more pertinently, the funds that flow pursuant to them) have been held by our courts not to be capable of being overturned/avoided by a liquidator/bankruptcy trustee i.e. not in the way that a preferential payment is obtained by a creditor issuing a statutory demand or commencing a winding up application – DFC of T v Donnelly (1989) ATC 5071; Macquarie Health Corp Ltd v FC of T (2000) ATC 4015.
Once a garnishee notice is issued by a statutory authority, our advice is that the ATO or State Revenue Office (SRO) will have the power to continue to collect upon the notice even if a liquidator/trustee is appointed. That said, we do try to negotiate a waiver of these rights by the respective tax collection agency, with some success in the right circumstances.
We have seen 2 recent bankruptcies where the ATO issued a garnishee to the debtor’s employer prior to each bankruptcy and the ATO continued to see their respective wage heavily docked for more than a year after the bankruptcy. The debts were greater than $1M in each case, so the garnishees would have continued for years (even after the bankruptcies) except that each bankrupt quit their jobs and got new roles. The change of employment was the re-set they needed bringing an end to the garnishee notice with the comfort that the bankruptcy meant that a new garnishee could not be issued.
We have also dealt with SRO garnishee notices to debtors of the company prior to the liquidation pursuant to section 65(1) Taxation Administration Act 2003 (Cth) (the Tax Act). SRO’s garnishee notices were in relation to outstanding payroll tax as a result of an audit on the company’s books and records and determined that the contractors were deemed to be employees of the company. Therefore, payroll tax was payable.
Our advice was that the SRO’s garnishee notices were flawed as they did not meet the criteria pursuant to section 65(2) of the Tax Act. Subsequently, SRO withdrew the notices, however, retained the sums collected under the flawed notices. Following legal advice and correspondence to and from the SRO, ultimately the monies collected were repatriated into the liquidation enabling us to pay outstanding superannuation. It is noteworthy that this was only possible as the garnishee notices were flawed, and the SRO was interested to see the rights of employees protected in the circumstances.
Article written by Nirav Shah (Manager) – Perth