Burdett-Baker, in the matter of AFS Group Limited (in liq) v National Australia Bank Limited

Federal Court of Australia|2015-07-03|Before: Gilmour J

Application 1 This is an application by Peter Reymond Quigley as liquidator (the Liquidator) of Perthmetro Pty Ltd (Perthmetro) appointed by a members' resolution pursuant to s 491 of the Corporations Act 2001 (Cth) (Corporations Act). 1 The Liquidator applied to the Court pursuant to s 511(1)(a) of the Corporations Act for determination of the question of whether one or more of Perthmetro's former employees should be rejected from proving in the liquidation for employee entitlements because their employment contracts are tainted by illegality or are offensive to public policy. 2 Section 511(2) relevantly provides that the Court, if satisfied that the determination of the question will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just. 3 The scope of section 511 has been considered in conjunction with that of the similar, but not identical, provision of s 479(3): see for example Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125; Meadow Springs Fairway Resort Ltd (In Liq) v Balanced Securities Ltd [2007] FCA 1443. Section 479(3), which applies to a court appointed liquidator in a court ordered liquidation, provides that the liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up. Section 511, which applies to a voluntary liquidation, provides that the liquidator, or any contributory or creditor, may apply to the Court to determine any question arising in the winding up of a company: s 511(1)(a)); see also Meadow Springs at [42]-[43]. 4 Ordinarily, the function of an application for directions under s 511 is to give the liquidator advice as to the proper course of action in the liquidation. However, there is clear authority on the point that the Court has the power to make orders affecting substantive rights of third parties by operation of the process under this provision: Re Willmott at [44]-[48], citing Meadow Springs at [50]-[51]. The limitation on the Court's power is s 511(2), which is referred to above: see also Re Willmott at [46] and [55]. 5 Whether the Court should entertain applications for the determination of substantive rights of third parties is a matter of discretion and of process and procedure for the Court: Re Willmott at [45]. Relevantly, Justice McLelland in Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 680 said, in relation to s 479(3), that it is sometimes a convenient course for a Court to determine such rights so long as, relevantly, the third parties will not suffer injustice as a consequence of the alteration of the nature of the proceedings. 6 Justice Davies in Re Willmott said at [45] that the authorities on s 479(3) "make it reasonably plain" that, before making substantive orders affecting the rights of third parties, the Court should offer those parties the opportunity to be heard. These considerations are applicable to s 511: Meadow Springs at [50]. 7 Those passages were cited with apparent approval by the Federal Court of Australia in Burdett-Baker, in the matter of AFS Group Limited (in liq) v National Australia Bank Limited [2013] FCA 799 at [22] to [59], in particular [42] to [45]. 8 There are four such parties who will potentially be affected by such determination: Mr David Hicks, Mrs Angela Hicks, Mr Robert Pilkington, and Mrs Jackie Pilkington. Each has been afforded that opportunity. Each was served with the originating process, which clearly identifies that substantive relief is sought which could adversely affect their rights and interests. Each has also been served with the supporting affidavit of the Liquidator sworn on 10 February 2015. Indeed each was given a draft of this before it was sworn and invited, by letter, to consider the application and proposed evidence and to contact the Liquidator's solicitors with any comments. Only Mr Hicks did, first by email sent to the Liquidator's solicitor on 13 February 2015, where he provided comments on the matters deposed in the supporting affidavit (the Email); later, by telephone, he said to the Liquidator's solicitor that he did not intend to appear and hoped that the Court would find that the employee entitlements would be admitted with priority. Each was also given written notice of the hearing date for the application.

Subject Employment Contracts 9 None of the four persons who may seek to prove Perthmetro's liquidation has yet lodged a proof of debt. It is unclear whether all four of them will. That may, in part at least, depend upon judgment in this application. 10 Perthmetro agreed with two employees and their respective wives that it would direct payment of part of their salary to their wife in each case, one of whom worked part-time for the company and one who did not. The purpose of this part of the arrangement was to split income to take advantage of the lower income tax rates for lower incomes. It was an arrangement to evade payment of income tax. The particulars of these arrangements are set out below. The facts 11 Perthmetro carried on business as a builder of commercial buildings. The records held by the Australian Securities and Investment Commission (ASIC) in relation to Perthmetro show that Mr Brian Gillespie has been the sole director at least from April 2010. The company's accountant and financial controller is Mr Tit Seng Wong. The records of ASIC also show that the shares of Perthmetro are held non-beneficially by three individuals - Mr Michael Harper, Mr Pilkington and Ms Donna Richardson. Mr Hicks, Mr Pilkington and Mrs Pilkington were each employed by Perthmetro at the date of liquidation, 1 October 2013. Mr Pilkington commenced employment with Perthmetro on 17 August 2011. Mr Hicks and Mrs Pilkington commenced employment with Perthmetro on 22 March 2012. Mr Pilkington and Mrs Pilkington were at all material times, husband and wife. 12 None of the employment agreements sought to be impugned in this application, is in writing. However, it is not in issue that the following persons were employees of Perthmetro at all material times.

David Hicks 13 Between 22 March 2012 and the date of termination of Mr Hicks' employment on 2 October 2013 (as a result of Perthmetro being placed into liquidation), Perthmetro paid to him a gross weekly wage of $1,400.00. 14 Further, from 22 March 2012 and continuing to 19 September 2013 Perthmetro paid to Mrs Hicks, who is married to Mr Hicks, a weekly gross weekly wage of $907.69. However, Mrs Hicks did not work for Perthmetro. The payments made to her represented part of her husband's total salary entitlement. 15 The arrangement as each of Mr and Mrs Hicks and Perthmetro, through both Mr Gillespie and Mr Wong, well knew, was to enable Mr Hicks to pay less tax than he otherwise would. Mrs Hicks had PAYG tax instalments deducted by Perthmetro on the payments made to her. She never worked for Perthmetro and the payments made to her under the guise of wages represented part payment of Mr Hicks' overall salary. 16 The payments represented an income splitting arrangement in order to reduce the income tax applicable to Mr Hicks' salary. 17 I am prepared to accept, as Mr Hicks contends in the Email, that he did not initiate the proposal to enter into such an arrangement; it was put to him by the company. Nonetheless, as he concedes in the Email, he agreed to the proposal. 18 The liquidator has calculated Mr Hicks' employee entitlements, subject to this judgment, based on weekly wages of $1,400. It takes no account of monies payable under the arrangement to Mrs Hicks. (i) Annual Leave Hours transferred from Kalrich (a former employer) 64.50 Hours accrued between 22/3/2012 and 2110/2013 223.70 Less: Leave hours taken (152.00) Available hours 136.20 Value: 136.2 hours x $46.0526 per hour + 17.5% = $7,370.02 Pay in Lieu of Notice (ii) 2 weeks x $1,400 per week = $2,800

Robert Pilkington 19 Between 22 March 2012 and the date of termination of Mr Pilkington's employment on 2 October 2013, Perthmetro paid to him a gross weekly wage of $1,898.00. 20 Perthmetro, during the same period, paid his wife, Mrs Pilkington, $28 per hour for part-time work but it also paid her, separately, a weekly payment of $577 which was actually part of her husband's wages which, again, was the product of an arrangement to reduce his tax liability. 21 This arrangement to reduce Mr Pilkington's tax liability was known to be such by him, his wife and Perthmetro, through at least Mr Gillespie. 22 The Liquidator has calculated Mr Pilkington's employee entitlements, subject to this judgment, without taking into account the wages, due to him, but actually paid to his wife in the liquidation of Perthmetro as: (i) Annual Leave Available hours at 22/3/2012 0.61 Hours accrued between 22/3/2012 and 2/10/2013 228.55 Less: Leave hours taken (121.60) Available hours 107.56 Value: 107.56 hours x $37.50 per hour + 17.5% = $4,739.36 (ii) Pay in Lieu of Notice 3 weeks (112.5 hours) x $37.5 per hour = $4,218.75 (iii) Retrenchment Pay 190.4 hours x $37.50 = $7,140

Jackie Pilkington 23 She was a part-time employee, and paid $28 per hour. 24 Between 22 March 2012 and the date of termination of Mrs Pilkington's employment on 2 October 2013, Perthmetro paid to her a gross weekly wage that varied in accordance with her weekly hours but was approximately $1,500 and included in its calculation the sum of $577 which was actually part of her husband's salary entitlement. 25 The Liquidator has calculated that Mrs Pilkington's employee entitlements, subject to this judgment, and excluding the weekly payments of $577 in the liquidation of Perthmetro as: (i) Annual Leave Hours transferred from Kalrich 104.75 Hours accrued between 22/3/2012 and 2/10/2013 196.14 Less: Leave hours taken (247.00) Available hours 53.89 Value: 53.89 hours x $28 per hour + 17.5% = $1,772.98 (ii) Pay in Lieu of Notice 2 weeks (60 hours) x $28 per hour = $1,680.00

Contracts illegal or offensive to public policy 26 The Supreme Court of Queensland Court of Appeal, by its own motion, declined to enforce a contract that included a scheme to defraud the Australian Taxation Office: Holdcroft v Market Garden Produce Pty Ltd [2001] 2 Qd R 381. Although that case does not concern avoiding PAYG taxation liabilities, it has some similarities to the subject of this application: both parties to the contract were party to the scheme, an amount negotiated to be otherwise legally paid under contract was paid in a way to avoid taxation and most of the contract payments have already been made and received without challenge.

Subject Contracts and Schemes 27 The schemes in the subject employment contracts are, on their face, offensive to the system to collect income tax in Australia. 28 The arrangements made in each case contemplated that salary payable to one person will be directed to another and withholding tax will be deducted as if the other person was entitled to that salary. Such arrangements required to be carried into effect, involved misrepresentations to the Commissioner for Taxation in respect of each person as to the amount of their earned income. 29 Lord Mansfield said in Holman v Johnson (1775) 98 ER 1120 at 1121; 1 Cowp 341 at 343: No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. 30 Albeit in the context of considering the statutory illegality of contracts, McHugh and Gummow JJ in Fitzgerald v F J Leonhardt Pty Limited (1997) 189 CLR 215 stated at 228-229: In Nelson v Nelson, McHugh J referred to the dictum of Lord Mansfield in Holman v Johnson that no court would lend its aid to a plaintiff founding the cause of action upon an immoral or illegal act. In Holman v Johnson itself, the actual holding was that the contract in question was insufficiently associated with or in furtherance of the illegal purpose of the defendant in buying tea to be smuggled into England without payment of customs duties. McHugh J identified authorities subsequent to Holman v Johnson which were to be seen as providing four exceptions or qualifications whereby relief was granted despite the presence of illegality. Three of these, those concerned with ignorance or mistake on the part of the claimant; the character of the statutory scheme as one for the benefit of a class of which the claimant is a member; and fraud, oppression or undue influence by the defendant, have been treated as instances of a broader principle. . . . A case may come within one of the accepted exceptions or qualifications to Holman v Johnson. As indicated above, these are set forth, with examples from authority, in the following passage from the judgment of McHugh J in Nelson v Nelson: "First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. Second, the courts will not refuse relief where the statutory scheme rendering: a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member. Third, the courts will not refuse relief where an illegal agreement was induced by the defendant's fraud, oppression or undue influence. Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect." (Footnotes omitted) 31 Their Honours went on to set out certain principles fashioned by McHugh J in Nelson v Nelson (1995) 184 CLR 538 at 613, relevantly as follows: Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless… (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies… 32 The Supreme Court of Queensland Court of Appeal in Holdcroft stated at [26]: Leaving aside for the moment questions of proportion and public policy that might induce a court to enforce a contract notwithstanding illegality in its performance [referencing Nelson at 612-613 and Fitzgerlad at 229-230, 250], the following statements of principle express the prima facie approach to be taken in cases where a contracting party knowingly makes a contract intending to use it to defraud the revenue. Those statements are based upon what might be called a minimal view of the ratio of Alexander v. Rayson: ''[A] party who executes a document with the intention of using it for the fraudulent purpose of deceiving and thereby defrauding the revenue authorities is disentitled from relying on that document in subsequent proceedings in a court of law to enforce rights conferred under that document… At the same time it must also be said that the principle involved in that decision has no application unless there was in law some exigible revenue of which the Crown or other relevant authority was in danger of being defrauded by the use of the document by the party having the requisite intention." (Footnotes omitted). 33 Borrowing from the language in Holdcroft at [27] to the present matter, "[a]ll the positive requirements for disentitlement are present in this case." 34 I am satisfied that each of the four employment agreements were structured as to payment with the knowledge and intent of all the parties such as to avoid the payment of tax which would otherwise have been payable. The arrangements involving Mr Hicks and Mr Pilkington were all encompassing in that they were agreed to by them, their wives and the company. 35 Mr Hicks' false income figure kept him below the $80,000 threshold in the relevant tax years, beyond which he would have had to pay tax on the amounts above that figure at a higher rate. His true income was approximately $120,000 per annum. 36 Mr Pilkington's false income figure was approximately $98,700 per annum. However, the true figure was approximately $128,700 per annum. Thus he too would achieve the goal by paying tax at the rate for income above $80,000 but on the reduced amount of approximately $18,700 instead of the true amount of approximately $48,700. 37 Each of the employment agreements of each of their wives was entirely falsely based. Neither was to perform any work for the amounts paid, but was to receive the payments actually forming part of their respective husband's income with the sole purpose of reducing each of their husband's tax liability. 38 To regard these arrangements or agreements as unenforceable is not, in my opinion, disproportionate to the seriousness of the unlawful conduct. The impugned conduct is very serious. The conduct also undermines the efficacy of the income tax regime and indirectly imposes a greater burden on other taxpayers. 39 Regard should be had to the Income Tax Assessment Act 1936 (Cth) Pt IVA, which concerns schemes to reduce income tax. Whilst this legislation does not expressly render agreements which classify as the relevant "schemes" as void, it seeks to cancel the effect of any contravening "scheme" and a resulting "tax benefit" by permitting the Commissioner of Taxation to determine that a tax adjustment should be made: see ss 177C, 177D and 177F. 40 It is unnecessary for me to determine the question whether, in fact, the employee agreements here constituted such a "scheme". It is sufficient for these purposes to state that Mr Hicks and Mr Pilkington did intentionally avoid payment of income tax to some extent. 41 I do not regard the employment agreement between Mrs Pilkington and the company to be caught up in the offending arrangement in which she was involved. Accordingly, her agreement remains enforceable. Orders 42 Accordingly, I make the following orders:

The plaintiff should not admit employee entitlements claims of David Hicks, Angela Hicks, Robert Pilkington or Jackie Pilkington (as to any amount for payments of remuneration on behalf of Robert Pilkington) as proof of debt in the liquidation of Perthmetro Pty Ltd (in liquidation).
The plaintiff should admit employee entitlement claims of Jackie Pilkington to an amount that does not include the remuneration paid or payable to her on Robert Pilkington's behalf as proofs of debt in the liquidation of Perthmetro Pty Ltd (in liquidation). I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Corporations Act 2001(Cth)ss 479(3), 491, 511(1)(a)

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