Court ruling puts taxman behind secured creditors in insolvency cases

Borrowers and banks got some rare good news at the end of a horror 2008. A landmark court ruling has pushed the tax office behind secured creditors when to comes to accessing the GST generated from a failed company’s sale of assets.

Borrowers and banks got some rare good news at the end of a horror 2008. A landmark court ruling has pushed the tax office behind secured creditors when to comes to accessing the GST generated from a failed company’s sale of assets.

The Federal Court’s decision involved collapsed property developer PM Developments, a company formerly owned by Mimi MacPherson. To date the tax office has had priority ahead of secured creditors for any GST that arises from the proceeds from an asset sale of a failed business. However the court held that the tax office will now rank behind secured creditors, including banks, for GST.

One banker told SmartCompany this was very good for borrowers. “That means when we are lending, we don’t have to make allowances for GST on the sale of the assets, which means we will lend more,” he says.

He says at present he is looking to lend more money to a property developer. “He already has borrowed $5 million and is geared to the hilt with no more security to offer. But this change has just added 10% to his security, so on a security lend there is more available to lend him.”

Tax practitioners speculated that the ruling would cause more receiverships as banks would have greater incentive to take action against collapsing firms.

However as bankers and the insolvency industry expects the tax office to appeal, uncertainty hangs over the ruling. Liquidators, receivers and administrators will be reluctant to act because if the ruling is subsequently reversed, they could well be left with a personal liability.