NEWS & INSIGHTS
SPOTLIGHT ON LAW: David vs Goliath — Court considers Government approach to defending insolvency litigation
There is an expectation that governments will deal honestly and fairly with the public through the litigation process, and act as a moral example for other litigants. This stems from the fact that governments have no genuine private interest in performing their functions and are most often larger and better resourced than their opponents.
How does this responsibility play out in practice? We look at some recent cases.
Reviewing: 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.
The various levels of government are in a unique position when litigating. This is primarily because, as the High Court noted in Thomas v Mowbray (2007) 233 CLR 307 at [260], “the Commonwealth is the best-resourced litigant in the nation”. This power differential means that, in its dealings with taxpayers, government entities of all types must be held to higher standards than those of individuals corporations.
We were recently interested to see a case involving a Queensland Government entity, in the case the Queensland Revenue Office where the QRO was unable to not rely on the good faith defence in section 588FG(2) of the Corporations Act 2001 (Cth) (Act).
OUR EARLIER STORIES
In two of our earlier articles, we have considered specifically issues associated with management of litigation:
Diversions: Litigation - There's a whole lot of relevance in the circus
For distressed or insolvent companies, sometimes the major route to recovery is tied up in a legal cause of action. However, a misguided approach to litigation can end badly.
When is the court room a good option? We look at the features and limitations of litigation.
What are the benefits and pitfalls of mediation?
In this article, we look at the measurement of a particular outcome and whether steps should be taken to speed the process towards a conclusion via mediation, where that is in the measured interests of a certain outcome.
ARG/KIRK CASE: FEDERAL COURT REJECTS GOOD FAITH DEFENCE TO UNFAIR PREFERENCE CLAIMS
In a recent case, the Federal 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 200 (Cth) (Act).
The Judgement is copied: 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
We note as follows (with the assistance of Corrs recent TGIF article):
- ARG Workforce Pty Ltd ran a labour hire services business as part of a wider group of companies;
- On 2 February 2022, liquidators were appointed to ARG. The Court found that both companies had been insolvent from 30 June 2019;
- During the six months before the relation-back day ARG made payments to the QRO of around $2.7M pursuant to payment arrangements;
- Following claims made by the liquidator, it was determined the QRO had not established the good faith defence in section 588FG(2) of the Act
The Corrs TGIF article can be found here Federal Court rejects good faith defence to unfair preference claims - Corrs Chambers Westgarth which sets out the details and takeaways.
ISSUE OF INTEREST: GOOD FAITH
The Court said the established principles of 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.
As to how to establish the defence, the Court said the approach in previous cases had 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”
The Court recognised that this approach could, in one view, be seen as unfair to the QRO, 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.
THE DECISION
The Court ultimately found that QRO had not established the good faith defence for several reasons (again noting the assistance of the Corrs/ TGIF article):
- First, the six QRO witnesses had no independent recollection of their dealings with [ARG], and their affidavits and evidence primarily addressed internal records rather than their contemporaneous state of mind.
- Second, one witness, who was heavily involved in the QRO's dealings with [ARG], 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 case is a reminder for institutional creditors such as government agencies that proving subjective good faith (at least for the purposes of section 588FG(2)(a)) demands rigorous evidence preparation and involvement of relevant witnesses, giving evidence of their contemporaneous state of mind.
COMLEK/MCCABE
Casting vote was for a proper purpose
In a recent article, we discussed our own litigation with the QRO that raised some similar issues: "The decision in Commission of State Revenue and Andrew McCabe and Ors is a timely reminder of the objectives of Part 5.7 of the Corporations Act 2001 and the termination of DOCA’s on the grounds of public interest".
The judgement in that case can be found here:
In the Comlek Judgement, Derrington J noted, specifically on the issue of the evidence of the QRO:
| Paragraph | Commentary |
| Paragraph 107 | Neither of the lay witnesses called for the Commissioner, Mr Jolly and Ms Cliffe …was able to say who made the decision to commence these proceedings. Neither could assist the Court with any information as to the nature and extent of the investigations that had, in fact, already taken place, or which remained to be undertaken. Mr Fox did not give evidence, despite the evidence of Mr Jolly that Mr Fox still worked for the QRO. Mr Jolly and Ms Cliffe were also unable to say whether there had been any follow up with the persons to whom the Notices of Investigation had been issued, in the terms specified in those notices. |
| Paragraph 108 | That is not to say that Mr Jolly and Ms Cliffe did not give their evidence honestly. They were placed in the unenviable position of being asked to produce affidavits which annexed internal documents, the relevance of which to the actual matters in dispute they knew nothing about. It remained unexplained why, as people holding senior roles, they agreed to do so. Neither Mr Jolly nor Ms Cliffe was the author of the 18 January Letter (conveying the results of the investigations said to have been undertaken), was involved in the day-to-day running of the litigation, or was even responsible for the preparation of their own affidavits. In fact, of the six people within the Commissioner’s office who did have some responsibility for the matter, none was called to give evidence, and none had reporting lines to Mr Jolly or Ms Cliffe in relation to this matter. Mr Jolly had no communication with any of those people about how the Commissioner should have voted at the Second Meeting of Creditors. The Court is entitled to expect that, even when evidence is being given on affidavit to adduce documentary evidence, the deponent has a working understanding of the documents and the case advanced. This is especially so when it is apparent from cross-examination that those who did have such knowledge could have been readily called by the Commissioner. More can, and ought reasonably, be expected of the Crown |
| Paragraph 109 | … Troublingly, Mr Jolly could not confirm that the selection of emails exhibited to his affidavit, and from which the Commissioner asked the Court to infer that they were indicative of “a deliberate, conscious or reckless avoidance of the consequences of the grouping provisions by certain directors of the Comlek Companies and their accountants”.. Taken as a whole, those communications are a relatively anodyne collection of messages between the directors and their accountants… |
| Paragraph 141, 142, 149 | For the following reasons, I am unable to conclude that, from the extent of the debt, the alleged systemic failure to account for payroll tax and the alleged involvement of the accountants in any such a failure, there is sufficient evidence to support a finding of deliberate tax defaults and evasion, or even to raise a serious question to be investigated by a liquidator Sixthly although it must be accepted that the Comlek Companies are indebted to the Commissioner for in excess of $10 million, the Commissioner’s submission, in the context of public interest considerations, that the Comlek Companies have “not contributed to State funds”, must be rejected. .It is also relevant to observe that the substantive failure to contribute to State funds is in an amount of approximately $3 million. The balance of the QRO debt is comprised of interest and penalties. That a balance of approximately $7 million was able to accrue over a decade without the alleged tax defaults and evasion having been brought to the attention of the Comlek Companies before September 2022 is inexplicable, and the Commission made no attempt to explain it, other than to rely on the “self-assessment” feature of payroll tax. |
The Court confirmed in Commissioner of State Revenue vs McCabe that the Administrators were justified in exercising their casting vote in the manner they did.
The comments of Goodman J in ARG/Kirk serve as a timely reminder for creditors such as government agencies that proving subjective good faith in such cases 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.
In McCabe/Comlek, and whilst considering a different issue, where the QRO was plaintiff (and Wexted Partners were defendants), there were similar shortcomings identified by Derrington J, principally relating to the appropriateness of the persons providing lay evidence to support the ‘public interest’ and other contentions of the QRO.
PRINCIPLES OF MODEL LITIGATION
Whilst the issues in these cases above are specific to the circumstances, they draw attention to the general issue of model litigant behaviour. Government must act in a way that is beyond reproach. These moral, ethical and professional standards form the basis for what is called the codified Model Litigant Obligations (MLOs).
What is the source of the MLOs?
Each state and the Commonwealth has a version of the MLO’s. In relation to Queensland specifically, the Model litigant principles | Department of Justice are summarised below:
| Queensland’s model litigant principles require the State and its agencies to act fairly, firmly, and in the public interest in all litigation. | |
| 1. The State and all agencies must conduct themselves as model litigants in the conduct of all litigation by adhering to the following principles of fairness |
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| 2. The State must behave as a model litigant in the conduct of all litigation, including significant litigation, by adhering to the following principles of firmness |
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| 3. Alternative dispute resolution |
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Practical takeaways
The cases we have outlined are obviously specific but involve matters where a well-funded government agency was, in turn, defendant and plaintiff in insolvency proceedings. In each case, the judge drew specific attention to shortcomings in the Government’s approach to witness preparation and selection.
It is important that in such cases, practitioners note:
- Awareness of the opponent: taking on well-funded government entities requires a degree of consciousness to the approach government can (and is required to) take
- Evidence: Ensure you own evidence and strategy is beyond criticism and reproach, and you are appropriately funded or protected to manage adverse costs;
- Avoid delays: Courts do not look favourably on a delay caused by a lack of resources;
- ADR: Consider throughout the proceeding appropriate opportunities to resolve contentious matters.
Published 8th April 2026
By Joseph Hayes
Partner