Bruton Holdings Pty Limited (in liquidation) v Commissioner of Taxation

REASONS FOR JUDGMENT 1 These reasons for judgment relate to two notices of motion. The first is that of the plaintiff, Bruton Holdings Pty Limited (in liquidation) (Bruton). Bruton seeks leave to appeal from declarations to the effect that Bruton is not entitled to indemnification by exoneration or recoupment out of the property of the Bruton Educational Trust for expenses incurred in certain proceedings after 28 February 2007. The first defendant, the Commissioner of Taxation (the Commissioner), seeks security for the costs of the appeal in the sum of $38,590 and a stay or dismissal of the appeal failing payment. 2 The declarations relate to reasons for judgment published on 3 and 9 September 2010 (Commissioner of Taxation v Bruton Holdings Pty Limited (in liquidation) [2010] FCA 978 and Commissioner of Taxation v Bruton Holdings Pty Limited (in liquidation) (No 2) [2010] FCA 998). 3 In the first of these decisions, Graham J found that from 28 February 2007 (being the date administrators were appointed to Bruton under s 436A(1) of the Corporations Act 2001 (Cth) and, by virtue of ss 513B and 513C of that Act, the date on which the winding up of Bruton is taken to have commenced) Bruton was a bare trustee of the Bruton Educational Trust. As such, Bruton's functions and responsibilities did not include instituting or maintaining the proceedings the subject of the declarations. These proceedings are NSD 1222 of 2006 (a challenge to the Commissioner's decision disallowing an objection in respect of Bruton's claim to be a tax exempt entity as a charity), NSD 966 of 2007 (a challenge to the validity of a notice issued by the Commissioner under s 260-5 of Sch 1 to the Taxation Administration Act 1953 (Cth)) and appeals by the Commissioner from that decision to the Full Court of the Federal Court (proceeding NSD 2315 of 2007) and the High Court (proceedings S68 of 2009 and S158 of 2009). 4 In the reasons for judgment published on 9 September 2010, Nicholas J made an additional declaration, sought by the Commissioner, in order to give effect to the reasons for judgment of Graham J. 5 Bruton wishes to argue on appeal that it incurred the expenses of the proceedings in the administration of the Bruton Educational Trust and/or in the proper performance of its duties and powers, with the consequence that it should be indemnified out of the trust fund for the expenses incurred by it in the various proceedings. To do so leave is required, the declarations being accepted by both parties to be part of an interlocutory process (albeit determining Bruton's rights). According to Bruton the decision denying it indemnity involves sufficient doubt and the capacity to work a substantial injustice such as to warrant the grant of leave. Further, even if it is correct to have characterised Bruton as a bare trustee after 28 February 2007, Bruton was obliged nevertheless to protect the assets of the trust. The Commissioner neither objected nor consented to the grant of leave but pointed out that, in order to succeed, Bruton would have to show that the litigation expenses fell within its right of indemnity out of the property of the trust deriving from its former office as trustee. 6 In this case: - (i) the issues are of general importance to the powers and rights of trustees, (ii) the state of the law regarding the powers and rights of bare trustees is not settled (for example, and as cited by Bruton, see Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281-282, Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 at 398 and Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639 at 651), and (iii) the declarations finally determine Bruton's rights and preclude it from seeking indemnity. The considerations of sufficiency of doubt and substantial injustice are not necessarily independent from each other. These factors support the conclusion that the grant of leave is appropriate. Accordingly, orders should be made in accordance with Bruton's notice of motion. 7 The Commissioner's claim for security is based on s 1335(1) of the Corporations Act, as well as the provisions dealing with security in the Federal Court of Australia Act 1976 (Cth) (s 56) and the Federal Court Rules (O 28). Section 1335(1) of the Corporations Act provides that: Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. 8 According to the Commissioner, Bruton has no assets. The trust fund has assets of $470,000. However, there is a debt owing to the Commissioner on account of unpaid tax in the sum of some $7.7 million arising from a notice of assessment issued on 26 March 2007 to the "trustee for the Bruton Educational Trust" (that is, Bruton). As such, the affidavits in support of the motion provide credible testimony that there is reason to believe that Bruton would be unable to pay any order for costs against it should it fail in the appeal. 9 According to Bruton, the Commissioner's case overlooked the fact that Bruton has costs orders in its favour against the Commissioner. Those orders, once taxed, will exceed the amount of the costs in the Commissioner's favour both on the appeal and in other proceedings where costs orders have been made against Bruton by a sufficient margin to enable set off and a balance owing in Bruton's favour. On Bruton's calculations, even on the worst case for it on taxation of costs, the Commissioner would owe Bruton some $78,000 which exceeds the amount claimed by way of security. On Bruton's best case the Commissioner would owe Bruton some $185,000 in costs. Either way the amounts owed to Bruton by the Commissioner are sufficient to cover the claim for security ($38,590) and leave a balance owing to Bruton. For these reasons, Bruton contended that s 1335(1) is not satisfied (that is, Bruton is not impecunious). Alternatively, Bruton contended that certain discretionary factors weighed against the making of any order for security, namely: - (i) the issues raised in the appeal are important, (ii) Bruton has no assets but the costs orders in its favour, (iii) the main creditor is the Commissioner who has no interest in supporting the appeal, and (iv) the order would stultify the appeal. 10 The Commissioner, in response, submitted that on its calculations set off of the costs orders would result in Bruton owing the Commissioner some $4,400 and in any event, none of the costs entitlements had been quantified. The amounts owing were thus uncertain and not equivalent to security. Further, the likelihood in the circumstances is that the costs of the appeal will reduce the amount the Commissioner can recover from the trust fund. Bruton has had a judgment against it below. Bruton should not be able to appeal thereby exposing the Commissioner to a risk that costs will not be recoverable even if the Commissioner succeeds. This is particularly so where the effect of Bruton succeeding in the appeal will be to reduce the amount in the trust fund available for payment to the Commissioner on account of the tax debt in circumstances where the liquidator (the person with the real interest in the appeal) will not be personally at risk in respect of the Commissioner's costs. 11 It is apparent that the costs the subject of existing orders as between Bruton and the Commissioner far exceed the likely costs of the appeal (as reflected in the amount the Commissioner seeks by way of security). Although not all of the costs the subject of existing orders have been quantified, and none taxed, it is at least arguable that Bruton is not impecunious in the relevant sense (that is, unable to meet a costs order against it). If that be so, there is no basis for the making of any order for security. 12 In any event, and assuming the Commissioner's position on the competing costs orders to be correct, there are discretionary factors which weigh against the making of the order for security. It is true that Bruton has had the benefit of access to the courts which resulted in the decision against it (Cowell v Taylor (1885) 31 Ch D 34 at 38). A party should not be given a "free hit" on an appeal (Tait v Bindal People [2002] FCA 322 at [4]). Nevertheless there are competing considerations in this case. The orders for costs Bruton has in its favour are available for set off. While the size of the tax debt dwarfs everything else the tax debt is not in issue in the appeal. If the main creditor were a third party and not the Commissioner there could be no doubt that the availability of set off would be taken into account in determining impecuniosity. It is hardly surprising that the Commissioner, as the main creditor, has no interest in funding the appeal. Nor is the position of the minor creditors surprising given the issue is one of indemnity out of the assets of the trust fund. The appeal is conceded by the Commissioner to be brought bona fide. While the Commissioner submitted that Graham J was on strong ground in refusing indemnity, the appeal is reasonably arguable and raises important questions of principle about the roles of trustees. While clearly brought in the liquidator's interest, the nature of the issue itself raises broader considerations of a general or public interest. Further, the making of the order will stifle the appeal. 13 The resolution of these competing factors is not easy. Ordinarily, an impecunious corporate litigant should not be permitted to prosecute an appeal whilst exposing the other party to a risk of not being able to recover costs. That is manifestly unjust. The circumstances of this case, however, are unusual. On balance the factors weighing against the making of an order for security (identified above) prevail. Accordingly, the Commissioners' motion should be dismissed. 14 The costs of both motions should be costs in the cause. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.