This week's TGIF considers Kirk (in his capacity as liquidator of ARG Workforce Pty Ltd (in liq)) v Commissioner of State Revenue, in the matter of ARG Workforce Pty Ltd [2026] FCA 192 (Kirk). In this case, the Federal Court (the Court) held that amounts paid to the Queensland Revenue Office (QRO) were unfair preferences. It said that QRO could not rely on the good faith defence in section 588FG(2) of the Corporations Act 2001 (Cth) (Act).

ARG Workforce Pty Ltd (Workforce) and ARG Payroll Pty Ltd (Payroll) operated a labour hire services business as part of a wider group of companies, known as the ARG group.

The QRO became aware of Workforce and Payroll through an inter-governmental ‘Phoenix Taskforce’, which shared information about companies suspected of engaging in phoenixing activity. Phoenixing activity is the practice of deliberately winding up a company to avoid liabilities, and then forming a new company in its place.

On 2 February 2022, liquidators were appointed to Workforce and Payroll. The Court found that both companies had been insolvent from 30 June 2019. Following an investigation by the QRO, Workforce and Payroll were registered for payroll tax from December 2019. They were assessed with liabilities of approximately $1.17 million and $280,000 respectively.

In the period before the liquidation, the QRO had issued numerous warning notices, overdue notices and final payment reminders to the companies.

In July 2021, Workforce and Payroll entered payment arrangements with the QRO. In those arrangements, a director of the companies attested that the companies were not insolvent and that the payment arrangements would not cause them to become insolvent.

During the six months before the relation-back day (being the date that the liquidator was appointed), Workforce and Payroll made payments to the QRO totalling $2,474,375.01 and $345,791.57 respectively pursuant to the payment arrangements.

It was common ground that these payments were unfair preferences under section 588FE of the Act.

Key takeaways

  • A creditor seeking to rely on the good faith defence must prove the defence by admissible evidence. This usually requires the creditor to adduce evidence from each person within the creditor that has knowledge of the transaction.
  • It can be difficult forinstitutional creditors (such as large companies and government bodies) to rely on this defence. When the relevant transactions span multiple years and involve various individuals within the creditor organisation, establishing good faith can necessitate adducing evidence from a large number of witnesses.
  • If a creditor cannot adduce evidence from a particular person involved in the transactions, in some cases the Court may allow a person’s state of mind (or the creditor’s state of mind generally) to be inferred from indirect evidence.

The issues: Good faith under the microscope

The sole question was whether the QRO had established the good faith defence in section 588FG(2) of the Act. To establish this defence, the QRO needed to prove:

  • it became a party to the transactions in good faith (588FG(2)(a)); and
  • at the time it became a party to each transaction, the QRO had no reasonable grounds for suspecting that Workforce or Payroll was insolvent, and that a reasonable person in the QRO's position would have had no such grounds (section 588FG(2)(b)).

Good faith — section 588FG(2)(a)

The Court in Kirk referred to established principles that good faith requires creditors to have acted with ‘propriety and honesty’, that the test for good faith is wholly subjective, and that creditors bear the burden of proof on the balance of probabilities. The Court emphasised that a creditor who knows of or suspects a debtor's insolvency on reasonable grounds would not ordinarily be acting in good faith (see Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266).

As to how company or governmental creditors establish that they entered into the transaction in good faith, the Court stated that the approach taken in previous cases has been ‘to require the defendant creditor to adduce evidence from each person within the company or government body who had relevant knowledge and then to assess, by reference to that knowledge in sum, whether the defendant creditor has discharged their onus’ (see Cook's Construction Pty Ltd v Brown (2004) 49 ACSR 62; Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353).

The Court recognised that this approach could, in one view, be seen as unfair to the QRO and creditors generally, particularly where the relevant transactions occurred years before the hearing and the witnesses have no recollection of the events. However, it stated that any such unfairness was a product of the legislature imparting the onus of proving good faith on the creditor.

If the relevant persons involved in the transactions could not give evidence or had no recollection of the dealings, the Court (in obiter) noted that in particular cases indirect evidence may be sufficient to establish good faith. That indirect evidence could be the internal systems or protocols a creditor has in place to identify solvency concerns, an individual’s general practice of responding to solvency concerns and where the relevant creditor’s documents reveal no indicators of a concern about solvency.

The decision

The Court ultimately found that the QRO had not established the good faith defence for several reasons.

First, the six QRO witnesses had no independent recollection of their dealings with Workforce or Payroll, and their affidavits and evidence primarily addressed internal records rather than their contemporaneous state of mind.

Second, one witness, (the Debt Resolution Officer, who was heavily involved in the QRO's dealings with Workforce and Payroll), was not called to give evidence. The explanation provided for his non-attendance (a medical certificate that failed to identify why the condition rendered him unfit for work) was inadequate.

Third, the indirect evidence relied upon by the QRO (which included substantial compliance with payment plans and an attestation by the director that the companies were not insolvent) was not sufficient to persuade the Court that QRO had acted in good faith.

The Court concluded that the QRO’s evidence did not establish that, at the time it received the payments, the QRO had no reasonable basis for suspecting that Workforce or Payroll were insolvent or, more generally, that they were acting in good faith when the payments were received. The evidence of particular focus was that:

  • QRO became aware of Workforce and Payroll through the inter-governmental ‘phoenixing’ taskforce;
  • QRO officers were considering the urgent need for recovery processes, including garnishee notices;
  • notices had been issued to financial institutions about Workforce, and bank statements that were produced showed the balances of the bank accounts and that Workforce was reliant on cashflow finance;
  • notices of default, overdue payment notices, warning and immediate payment notices were issued by QRO to the companies;
  • internal notes were made that Workforce was a ‘big risk’ and suitable for a garnishee notice; and
  • while the payments under the payment plan were paid on time (which were the payments being challenged as unfair preferences), the companies continued to accrue payroll tax which was unpaid.

No reasonable grounds for suspecting insolvency - section 588FG(2)(b)

The QRO argued that several factors indicated a lack of actual or reasonable suspicion of insolvency. This included the companies' substantial wage payments, the ‘significant funds’ apparent in bank statements and the director’s attestation that Workforce and Payroll were not insolvent.

The Court also concluded that there was countervailing evidence, including the QRO's knowledge of the ARG group's history of phoenixing, repeated earlier overdue notices, the known reliance of Workforce upon cashflow financing and the critical failure to adduce evidence from the relevant Debt Resolution Officer. This meant that the QRO had not established that there were no reasonable grounds for suspecting insolvency.

Conclusion

Kirk serves as a timely reminder for institutional creditors such as government agencies and large companies that proving subjective good faith for the purposes of section 588FG(2)(a) demands rigorous evidence preparation. All relevant witnesses involved should be called to give evidence and they must give evidence of their contemporaneous state of mind. If those witnesses cannot give this evidence, in some cases recourse may be had to indirect evidence.

Creditors receiving payments from debtors with a known history of phoenixing activity, or persistent non-compliance, should be alert to the risk that such payments may later be clawed back as unfair preferences in a liquidation.

For insolvency practitioners, when assessing the merits of an unfair preference claim, the decision underscores the importance of considering whether a creditor seeking to rely on section 588FG(2) as a defence will be able to adduce evidence from all persons involved in the relevant transactions.

Authors

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