The High Court has reversed an earlier decision which effectively gave the Tax Office a significant advantage over other unsecured creditors in event of liquidation.

On 26 August 2009 the High Court held that the Tax Office could not recover part of a tax debt owing by a company in liquidation by serving a garnishee notice on the company's lawyers for moneys held in trust for the company.

The High Court decided that the general garnishee provisions of the tax legislation were inapplicable in the liquidation context because of the existence of specific regime for the collection and recovery of tax liabilities of companies in liquidation whereby liquidators have to set aside an amount sufficient to pay the Tax Office as an unsecured creditor.

The High Court looked at the liquidation provisions of the Corporations Act, in particular section 500 of the Corporations Act, which invalidates any attachment on the property of a company in liquidation in support of its view that the general garnishee provisions do not apply to the recovery of debts owing to companies in liquidation.

This decision has resolved one of the outstanding issues concerning the rights of the Tax Office against liquidators.