BCI Finances Pty Ltd (in liquidation) v Commissioner of Taxation

BETWEEN: BCI FINANCES PTY LIMITED (IN LIQUIDATION)

JUDGE: GLEESON J DATE: 6 AUGUST 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 John Sheahan and Ian Russell Lock as joint and several liquidators ("the liquidators") of the applicant ("BCI Finances") apply for the following order: To the extent necessary, an order that [the liquidators] be given leave nunc pro tunc to use in connection with and for the purposes of the winding up of [BCI Finances] the documents produced to the court by Signet Lawyers [("disputed documents")] pursuant to subpoena dated 9 April 2014 addressed to Signet Lawyers [("the subpoena")]. 2 The order is sought by 7 August 2014 to enable the liquidators to use the documents in an examination of a director of the applicant, Andrew Binetter, scheduled for 7 August 2014. The solicitor for the liquidators, Mr Cudmore, said that the order was sought "out of an abundance of caution" against the possibility that the liquidators' entitlement to use the documents is affected by an implied undertaking to the Court to use the documents only for the purpose of these proceedings, except with the Court's leave. 3 If there is such an implied undertaking, it would be derived from the substantive legal obligation imposed on a party to litigation who obtains disclosure of documents or information under compulsion not to use the documents or information for any purpose other than that for which it was given without the leave of the court, unless it is received into evidence: Hearne v Street (2008) 235 CLR 125 at [96] ("Hearne"). The principle has been held to apply to documents produced under subpoena: Eltran Pty Ltd v Westpac Banking Corporation (1990) 25 FCR 322. 4 The order is opposed by Andrew and Margaret Binetter, whom I was informed are directors of the applicant. They did not tender any evidence in opposition to the proposed order. The basis of the opposition is not a claim of prejudice arising from the release of the implied undertaking. There is no suggestion that any injustice would be occasioned to the party who has produced the documents. Rather, the submission is that the liquidators have not provided a sufficient justification for the release of the undertaking.

Disputed documents 5 The disputed documents are contained in two lever arch files. The liquidators did not provide any detailed description of the documents, although the court was invited to look at them. The evidence is that the disputed documents were provided by an Israeli bank called Bank Hapoalim to Israeli lawyers acting for the applicant. The purpose for which the documents were provided to the Israeli lawyers is not clear. 6 The documents were sent by the Israeli lawyers to Signet Lawyers in two tranches, presumably on instructions from the applicant. The first tranche was accompanied by a letter dated 14 January 2014 which states relevantly: Please find attached a copy of the two binders of documents received from Bank Hapoalim Ltd that do not raise the third party waiver issues. 7 The second tranche was accompanied by a letter dated 5 February 2014 which states relevantly: Please find attached a copy of the documents received from Bank Hapoalim Ltd that to their perspective raise the third parties' waiver issue. 8 At the time that Signet Lawyers received the documents, that firm was acting for the applicant in the substantive proceedings, which are a taxation appeal brought under Part IVC of the Taxation Administration Act 1953 (Cth). I infer that the documents were sent to Signet Lawyers for the purposes of the taxation appeal. 9 According to a document attached to orders made by Jagot J in August 2012: The proceedings are an appeal by the applicant, BCI Finances Pty Ltd, from a decision of the respondent, the Commissioner of Taxation, to disallow an objection to assessments of income tax for the tax years ending 30 June 1997 to 30 June 2008. In the relevant income years, the applicant claimed that it had loan agreements in place with Bank Hapoalim, BM in respect of which it had made interest payments. The applicant claimed deductions in respect of these interest payments. The loans that the applicant claimed and claims to exist comprise a loan of 12,000,000 Swiss Francs said to have been entered into on 25 April 1993 and a loan of A$3,848,552 said to have been made on 24 April 2006. In issuing the assessments the subject of the appeal proceedings, the respondent Commissioner of Taxation disallowed certain deductions claimed by the applicant as interest and withholding tax in respect of the loans, included as income a payment made pursuant to the claimed loan arrangements in the 2006 tax year and imposed administrative penalties. In the proceedings, the applicant has the burden of proving that the assessments are excessive. The applicant contends that the loans were made to it by Bank Hapoalim, BM, that it made the interest payments and that the interest payments and withholding tax were and are properly deductible. The respondent contends that the applicant has not discharged its burden of proving that the loans were made, or made on the terms contended by the applicant, that the payments made by the applicant were interest payments and that such payments as were made were properly deductable [sic]. 10 In the reasons for judgment (BCI Finances Pty Ltd v Commissioner of Taxation [2012] FCA 855) at [7], her Honour records that: …there has been an issue about the provenance, integrity and adequacy of documents said to constitute the loan agreements and other arrangements between the applicant and Bank Hapoalim since at least 20 October 2006 when there was an audit occurring in relation to the applicant's activities. It is not necessary to identify the lengthy course of correspondence between the Commissioner and the applicant other than to say that the correspondence is indeed lengthy, extending over many years, and that as part of that correspondence the obtaining of documents from Bank Hapoalim has always been in the forefront of the issues between the parties. 11 At [20], her Honour accepted that "a central issue in this proceeding is the provenance, integrity and adequacy of documents evidencing the loans and other arrangements between Bank Hapoalim and the applicant". At [21], her Honour said that "[d]espite numerous attempts to obtain relevant documents so as to demonstrate the genuineness of those loans the documents which have been produced thus far by the applicant, not unreasonably from the Commissioner's point of view, raise more questions than they answer." 12 I infer from the fact of their production in answer to the subpoena that the disputed documents have at least apparent relevance to the issues in the substantive proceedings. 13 The solicitor for the liquidators, Mr Cudmore, did not seek to tender the disputed documents, arguing that to do so would subvert the implied undertaking to the court which is sought to be respected by the proposed order. I am not convinced that this is correct. Rule 20.03(2) of the Federal Court Rules 2011 (Cth) expressly provides for the use of documents in open court on terms that the implied undertaking will continue to apply to the document. 14 In reply, Mr Cudmore encouraged me to review the disputed documents. Despite the opposition of senior counsel for Andrew Binetter, Mr Henry SC, for reasons I will give later, I decided to review the documents. Based on that review, the documents appear to be copies of records and documents kept by Bank Hapoalim referring to the applicant and evidencing the bank's arrangements with the applicant. Without seeking to be comprehensive, the documents include: a. Correspondence from the applicant to the bank; b. Minutes of meetings of the directors of the applicant; c. Documents purporting to record agreements or arrangements between the applicant and the bank; d. Correspondence from the bank to the applicant; e. Print outs that appear to be bank account statements.

Circumstances in which the liquidators obtained the disputed documents 15 On 5 March 2014, the directors of the applicant resolved that the company was insolvent, or was likely to be insolvent at some future time, and that administrators be appointed to the company under s 436A of the Corporations Act 2001 (Cth) ("Corporations Act"). 16 The liquidators suspect a connection between the arrival of documents from Bank Hapoalim in Australia in January and February 2014, and the appointment of the administrators in March 2014. 17 On 9 April 2014, the subpoena pursuant to which the disputed documents were obtained was issued by this court at the request of the respondent. The subpoena required production of: All documents provided by Bank Hapoalim B.M. (or a representative of Bank Hapoalim or [BCI Finances]) to you, or to [BCI Finances], or to any person or entity on behalf of you or [BCI Finances] following the directions hearing before Judge Ido Druyan of the Magistrates Court Tel-Aviv Jaffa, Israel in proceedings 47617-02-13 on 31 December 2013 as referred to in [BCI Finances]'s motion filed in those proceedings on or about 26 January 2014… 18 It is not clear how the respondent came to know or believe that documents had been provided by Bank Hapoalim to Signet Lawyers. However, there is a document dated 26 January 2014 in Hebrew script which appears to record the outcome of proceedings involving the applicant and the respondent in Israel. The translation of the document includes a statement to the effect that Bank Hapoalim had delivered certain documents to the Israeli lawyers on behalf of the applicant. Specifically the translation records: …BCI company approached the bank and asked for its accounts (When it has been clarified that the request was made under BCI company, being a customer of the bank, and entitled to receive documents relating to these proceedings regardless). In light of this request, the bank delivered to the undersigned (after a while) part of the documents that were requested and as for some of them, BCI company was asked to provide third party agreements to deliver the material - a request that is being dealt with currently. 19 The liquidators seek to infer that the first tranche of the disputed documents is the documents referred to in the translation, being documents delivered by the bank to the Israeli lawyers pursuant to an entitlement of the applicant to receive them, and in advance of the second tranche, those being documents which were to be released on the provision of "third party agreements". In my view, having regard to the dates of the two letters under which the disputed documents were provided to Signet Lawyers and the date of the translation, it is more likely than not that the liquidators' inference is correct. Accordingly, I draw that inference. 20 On 23 April 2014, the liquidators were appointed as liquidators of the applicant by a resolution passed by the creditors of the applicant pursuant to s 439C(c) of the Corporations Act. The minutes of the meeting of creditors show that the liquidators were nominated by the Australian Taxation Office, and include a suggestion that taxation liabilities may account for 95% of the total debts of the applicant. It is also suggested that the Commissioner is the only creditor independent of the applicant. 21 Shortly after their appointment, the liquidators took steps to seek from Signet Lawyers the applicant's "legal file". In particular, by letter dated 29 April 2014 to Signet Lawyers, the liquidators said: Please ensure that any and all documents produced in the course of [these proceedings] are included with your provision of the Company's legal file, including all books, records, statements, accounts and other documents produced by Bank Hapoalim BM. 22 On 2 May 2014, the liquidators attended the offices of Signet Lawyers to examine the applicant's legal file. Mr Sheahan asked about the whereabouts of "the documents produced by Bank Hapoalim". In response, he was told: The production to you of documents that were provided by Bank Hapoalim is problematic. Signet Lawyers are seeking advice from Watson Mangioni in relation to that issue. 23 By 22 May 2014 the liquidators had not obtained any documents from Signet Lawyers that had been provided by Bank Hapoalim. 24 That day, there was a directions hearing before Jagot J. On that occasion, orders including the following were made: 1. Each of Mr Andrew Binetter, Mr Gary Binetter and Ms Margaret Binetter be joined as a party to these proceedings. 2. Each of Mr Andrew Binetter, Mr Gary Binetter and Ms Margaret Binetter pay the respondent's costs of the proceedings on a full indemnity basis as agreed or taxed. 3. Leave be granted to the joint liquidators of the applicant to have first access to the documents produced under subpoena by Signet Lawyers Pty Ltd until 23 May 2014 ("documents"). 4. Thereafter, leave be granted to the respondent [singular] to have access to the documents. 5. Leave be granted for this application to proceed against the applicant despite the applicant being placed in liquidation. 25 It appears from the transcript of the directions hearing that the only outstanding issue in the proceeding as at 22 May 2014 was an application for indemnity costs against the applicant. However, I understand that there was also an issue as to the satisfaction of the letter of request that had been ordered in August 2012.

Events following liquidators' access to the disputed documents 26 The liquidators gave evidence that they have been using the disputed documents in connection with the winding up of the applicant since they obtained access to them on 22 May 2014. They have been doing so in the belief that the documents are the applicant's documents and that they were therefore entitled to receive the documents in the winding up. 27 Although Andrew Binetter does not appear to have been granted access to the disputed documents by her Jagot J, the Court file shows that his legal representatives obtained access to the disputed documents on 6 June 2014. I was also informed from the bar table that an affidavit was served by the Commissioner of Taxation on Andrew Binetter's lawyers in support of the Commissioner's application to be released from the implied undertaking in respect of the disputed documents, which affidavit purports to attach to it the entirety of the disputed documents. The fact is that the disputed documents are in the control of the Court: Telstra Corporation Ltd v Minister for Communications, Information Technology and the Arts [2007] FCA 1398 at [47]. A court may inspect documents produced to the court to determine claims of legal professional privilege Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49 at [52]; or public interest immunity Commonwealth v Northern Land Council (1993) 176 CLR 604 at 617. Given that Andrew Binetter was both given access, and had his legal representative inspect the disputed documents and given that the Commissioner served on his lawyers an affidavit purporting to attach the disputed documents so that he was in a position to know their contents, I do not accept that there is any unfairness entailed in my inspecting the documents in this case. 28 On 19 June 2014, a Registrar of the Court made orders including an order pursuant to s 596A of the Corporations Act that Andrew Binetter be summoned to attend before this Court to be examined in respect of the examinable affairs of the applicant. The summons for examination also required the production of books, including books evidencing any transaction or dealing of the applicant with Bank Hapoalim. 29 There is no suggestion that the relationship between Bank Hapoalim and the applicant does not form part of the examinable affairs of the applicant, and nor could there be any such suggestion. 30 On 10 July 2014, the date of Andrew Binetter's examination was changed to 7 August 2014.

Issues for resolution 31 The liquidators gave evidence that they consider the disputed documents "to be documents to which BCI Finances was entitled both as its property and as documents in the possession of Signet Lawyers for the purposes of these Federal Court proceedings which Signet Lawyers were conducting on behalf of BCI Finances". 32 The liquidators do not seek a declaration as to the ownership of the documents, or a declaration to the effect that they are not subject to any implied undertaking to the Court as to the use of the disputed documents. However, they contend that they were entitled to receive copies of the disputed documents apart from their entitlement pursuant to the access granted by the Court. An important element of the liquidators' argument is that this entitlement warrants their release from any implied undertaking. 33 Accordingly, the issues to be determined are: a. Are the disputed documents subject to an implied undertaking given by the liquidators to the Court to use the documents only for the purposes of these proceedings, except by leave? b. If so, should the Court grant leave to the liquidators to use the disputed documents for other purposes connected with the winding up of the applicant?

Are disputed documents subject to an implied undertaking? 34 The liquidators obtained access to the disputed documents under compulsion of the subpoena issued at the request of the respondent. The documents were not provided to the liquidators voluntarily. 35 In National Mutual Holdings Pty Ltd v Sentry Corporation & Ors [1990] FCA 156 Northrop J said (at [32]): It is clear that according to Australian law a person who acquires a document pursuant to the processes of the Court is under a duty not to disclose or make use of that document for purposes other than the Court proceedings without the leave of the Court or the person from whom the document has been obtained. 36 That passage was cited with approval by French J in QPSX Limited v Ericsson Australia Ltd (No 5) [2007] FCA 244. 37 Although the general principle as stated in Hearne applies to parties to litigation, I can see no reason why the principle does not extend to the liquidators of the applicant in the circumstances of this case. Although the solicitor for the liquidators asserts an entitlement to the disputed documents, the fact remains that access to the documents was clearly obtained pursuant to a court order. 38 It follows that, in obtaining access to the disputed documents, the liquidators became subject to an implied undertaking to the Court not to use the documents for any purpose other than these proceedings, without the leave of the Court.

Should the liquidators be released from the implied undertaking?

Relevant principles 39 In Liberty Funding Pty Ltd v Phoenix Capital Pty Ltd [2005] FCAFC 3, the Full Court considered whether leave should be given for the use of an affidavit filed in the Federal Court in subsequent proceedings alleging breaches of confidence and of copyright. The Full Court said relevantly at [31]: In order to be released from the implied undertaking it has been said that a party in the position of the appellants must show "special circumstances": see, for example, Springfield Nominees Pty Ltd v Bridgelands Securities Ltd (1992) 38 FCR 217 [("Springfield Nominees")]… The notion of "special circumstances" does not require that some extraordinary factors must bear on the question before the discretion will be exercised. It is sufficient to say that, in all the circumstances, good reason must be shown why, contrary to the usual position, documents produced or information obtained in one piece of litigation should be used for the advantage of a party in another piece of litigation or for other non-litigious purposes. The discretion is a broad one and all the circumstances of the case must be examined. In Springfield Nominees, Wilcox J identified a number of considerations which may, depending upon the circumstances, be relevant to the exercise of the discretion. These were: • the nature of the document; • the circumstances under which the document came into existence; • the attitude of the author of the document and any prejudice the author may sustain; • whether the document pre-existed litigation or was created for that purpose and therefore expected to enter the public domain; • the nature of the information in the document (in particular whether it contains personal data or commercially sensitive information); • the circumstances in which the document came in to the hands of the applicant; and • most importantly of all, the likely contribution of the document to achieving justice in the other proceeding. 40 There is a reference in that passage to the use of material for the advantage of a party. It is not strictly complete to refer to the liquidators' proposed use of the disputed documents as use "for the advantage of another party". In this case, the liquidators seek to use the documents to discharge their statutory functions. 41 In Australian Securities & Investments Commission v Marshall Bell Hawkins Limited [2003] FCA 833 ("Marshall Bell Hawkins"), Merkel J said: [12] Generally, a party applying for the modification or release of the undertaking should: • specify the documents in respect of which the modification or release is sought; • specify the purpose for which the modification or release is sought; and • satisfy the Court that the special circumstances relied upon by the party warrant or justify the modification or release sought. [13] The requirements of specificity in respect of the documents to be used and the purpose for which they are to be used is appropriate because the implied undertaking should only be modified or released to the extent that it is in the interests of the administration of justice or in the public interest to do so: see Springfield Nominees at 225 and Moage Limited (in liq) v Jagelman [2002] NSWSC 953; (2002) 43 ACSR 173 ("Moage") at 176. Thus, the modification or release should be no greater than is necessary or appropriate to meet the interests of the administration of justice or the public interest. Further, in determining whether to exercise its discretion to grant the modification or release sought, it will usually be necessary for the Court to identify with precision the documents to be released and the purpose of that release. 42 In that case, Merkel J declined to grant a release from the implied undertaking to ASIC in connection with 40 boxes of discovered documents. Although ASIC submitted that the discovered documents were relevant to all of the decisions it may have been required to make in relation to a particular licence, there was no evidence to that effect. His Honour noted that he was not satisfied that all of the documents were needed for, or were relevant to, any particular decision. His Honour also concluded that it was incumbent upon ASIC to adduce some evidence as to its purpose, rather than to make assertions as to that purpose. 43 In ASIC v Australian Property Custodian Holdings Ltd (receivers and managers appointed) (in liquidation) (controllers appointed) [2013] FCA 74 at [9] ("Australian Property Custodian Holdings"), Murphy J accepted that it would usually be necessary for the party applying for modification or release from the undertaking to specify the documents in respect of which the modification or release is sought. He adjourned the application to enable better specification of the discovered documents the subject of the application. His Honour also expressed the preliminary view that it would not be necessary to show the relevance and use of the documents by reference to individual documents in the circumstances of that case, noting that the documents were voluminous and that the parties objecting to the use had not established any significant prejudice.

Use of disputed documents by liquidators to date 44 Mr Sheahan gave evidence that the liquidators have considered the disputed documents and have used the documents for the purposes of the winding up, including in the proceedings in which the order has been made for Andrew Binetter's examination scheduled for 7 August 2014. 45 To the extent that the court considers that the liquidators ought not to have done so, the liquidators seek an order that they be given leave to the use the documents nunc pro tunc. 46 No opposition was raised to this aspect of the application. 47 In the absence of any suggestion that the liquidators' use to date of the disputed documents has been improper (except to the extent that it was inconsistent with the implied undertaking), I will make an order nunc pro tunc releasing the liquidators from the undertaking in respect of their use of the documents to date.

Use of disputed documents in connection with and for the purposes of the applicant's winding up 48 I have some difficulty with the proposition that Mr Binetter's legal representatives do not know what documents are comprised in the disputed documents. As a result of further argument this morning, it appears to me that Mr Binetter's legal representatives are in a position to know, substantially, if not entirely, the contents of the disputed documents. In those circumstances, as a director of the company, in my view, Andrew Binetter was in a position to inform the Court about whether the documents are owned by the applicant or whether they are owned or subject to a claim by a third party. In my view, Andrew Binetter should have been in a position to inform the court about the ownership of the documents. He was also, in my opinion, in a position to assist the Court as to whether the documents should have been provided to the liquidator without the requirements of compulsory process. He was also in a position to give instructions as to whether there was any basis for a submission disputing the liquidator's entitlement to the documents apart from compulsory process. 49 In the absence of any submission from Mr Henry SC that the liquidator was not entitled to the documents, and in the absence of any objection from Signet Lawyers on that basis, looking at the nature of the documents and the circumstances in which they came into Signet Lawyers' hands, and the absence of anything in the documents suggesting that there is a restriction on the use of the documents, I am satisfied on the balance of probabilities that the liquidator was entitled to receive the documents from Signet Layers in the ordinary course and without resort to compulsory process. 50 I have already found that the disputed documents appear to be copies of records and documents kept by Bank Hapoalim referring to the applicant. It should be borne in mind that the applicant has never denied that it had a relationship with Bank Hapoalim: it said that it borrowed money from the bank and paid interest which it treated as allowable deductions in its income tax returns. Having regard to the issues in these proceedings, and regardless of the ownership of the disputed documents, documents obtained from Bank Hapoalim concerning the applicant (which these documents are) are of obvious relevance to a central issue in the examinable affairs of the applicant, namely the arrangements between the applicant and Bank Hapoalim. 51 In submissions, Mr Cudmore solicitor for the liquidators identified the general purpose for which the liquidators seek to use the documents as the winding up. More specifically, he referred to the purposes of determining: a. whether or not there are causes of action available to the liquidators against the directors of the applicant "or persons knowingly concerned"; b. what "really was happening with the money", which I take to mean determining the flow of funds between Bank Hapoalim and the applicant; c. what really was happening in these proceedings, having regard to the fact that the issues appear to have been very hard fought and then abandoned shortly after the disputed documents came into the hands of Signet Lawyers. 52 Mr Henry SC submitted that the liquidators have not met the evidentiary requirements identified in cases such as Marshall Bell Hawkins and Australian Property Custodian Holdings for a release from the implied undertaking. He also argued that the liquidators had not exhausted their efforts to obtain the disputed documents from Signet Lawyers pursuant to s 530B of the Corporations Act and that this was a consideration weighing against the existence of special circumstances. 53 Although it would have been preferable to have received more information about the precise intended use of the documents, I am satisfied that the proposed use, though general, is a proper use. In my opinion, the special circumstances warranting the release of the implied undertaking for the purposes of the winding up are: a. I am satisfied that the liquidators seek to use the documents for the purpose of discharging their statutory duties and not for any other purpose; b. There is a public interest in favour of the use of the documents for the purpose of giving effect to the objects of the Corporations Act; c. There is no evidence of any relevant prejudice to any party arising from the use of the documents. In particular, this is not a case where confidential documents of a party have been disclosed to an opposing party; d. The party who produced the documents under compulsion (Signet Lawyers) does not object to the release; e. I am satisfied that the documents are documents to which the liquidators were entitled as of right, in the same way as they were entitled to the balance of Signet Lawyers' "legal file".

Conclusion 54 I would order that the liquidators be given leave nunc pro tunc to use the disputed documents for the purposes of the winding up of BCI Finances. Further, I would order that Andrew Binetter pay the liquidators' costs on this application on a party-party basis. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.