Commissioner of Taxation v Grimaldi

REASONS FOR JUDGMENT 1 These proceedings were instituted by an Application filed 11 May 2009 in which the substantive relief sought related to alleged tax liabilities of the first respondent, the second respondent, the third respondent and the fourth respondent. 2 In relation to the assets of those respondents and also the fifth respondent referred to in a Notice of Motion filed 11 May 2009, freezing orders have been sought by the applicant under Order 25A rules 5(4) and 5(5) of the Federal Court Rules to prevent an abuse or frustration of the process of the Court in respect of the primary claims for relief. In relation to applications such as this, I would refer to the applicable principles as summarised by me in Ron Medich Properties Pty Ltd v Bentley-Smythe Pty Ltd (No. 3) [2009] FCA 335 ('Medich') at [10]-[24]. None of the parties to whom this judgment relates submit that the summary of the principles in Medich contains any errors. 3 On 19 May 2009 freezing orders were made by consent and without admissions against the second respondent restraining him from removing from Australia or in any way disposing of, dealing with or diminishing the value of his Australian assets up to the unencumbered value of $A 3,519,120.99 other than to make a payment to the applicant. The relevant freezing order also provided that if the unencumbered value of the second respondent's Australian assets was less than the said amount and he had assets outside Australia, he was also restrained from disposing of, dealing with or diminishing the value of his Australian assets and his ex-Australian assets up to the unencumbered value of the said amount. It is necessary to turn to the precise terms of the order to identify the ambit of the restraint which was imposed upon the second respondent. In defining the assets of the second respondent to which the restraint applied paragraph 6(1)(c)(ii) of the orders defined 'your assets' as including 'the sum of AUD$220,000' held in ten bank accounts in New Zealand (eight at ANZ National Bank Limited and two at Bank of New Zealand) in the name of the fifth respondent. There is no evidence as to the amount standing to the credit of those accounts and, for reasons which will shortly appear, there are, so it would seem, other claims upon the monies standing to the credit of some or all of the bank accounts mentioned in the said orders. 4 On 22 May 2009 freezing orders were made by consent and without admissions against the first and fourth respondents. 5 The orders made against the first respondent restrained him from removing from Australia or in any way disposing of, dealing with or diminishing the value of his Australian assets up to the unencumbered value of $A 35,807,867.41 other than to make payment to the applicant. Once again the orders extended to assets of the first respondent outside Australia if the unencumbered value of his Australian assets fell below the said amount in which case the restraint extended to both the first respondent's Australian assets and his ex-Australian assets up to the unencumbered value of the said amount. In paragraph 6(1)(c)(ii) of the freezing orders against the first respondent his assets were defined as including '[t]he sums of US $32,142.56 and AUD $14,263,136.36' held in the same ten bank accounts in New Zealand in the name of the fifth respondent. 6 The freezing orders made in respect of the assets of the fourth respondent restrained it from removing from Australia or in any way disposing of, dealing with or diminishing the value of its assets in Australia up to an unencumbered value of $A 6,151,624.64 other than to make payment to the applicant. Once again the freezing orders extended to assets outside Australia in the event that the unencumbered value of the fourth respondent's Australian assets was less than the said amount in which case the restraint applied to both Australian and ex-Australian assets up to the unencumbered value of the said amount. Once again paragraph 6(1)(c)(ii) of the freezing order defined the assets of the fourth respondent to which the restraint applied as including 'the sums of US$32,142.56 and AUD$14,263,136.36' held in the ten bank accounts in the name of the fifth respondent to which reference has already been made. Presumably, given the identical amounts, the applicant is contending that the assets of the first respondent are also the assets of the fourth respondent. 7 Resolution of the differences between the applicant and the first, second and fourth respondents in respect of the applicant's Notice of Motion filed 11 May 2009 has left for determination, the claims for freezing orders against the third respondent, a party to the proceedings, and the fifth respondent as a 'third party' against whom freezing orders have been sought. 8 On 11 May 2009 the duty judge made freezing orders against each of the first, second, third, fourth and fifth respondents up to and including 5:00pm on Friday 15 May 2009 but those orders lapsed on that day. 9 The applicant's Notice of Motion came before me for hearing as the docket judge on 19 May 2009, 20 May 2009, 22 May 2009, 1 June 2009 and 5 June 2009. 10 On 20 May 2009 the third and fifth respondents by their counsel without admissions and without prejudice to any entitlement to resist the making of a freezing order gave to the Court an undertaking that the third and fifth respondents would take no steps which may be open to them to dispose of or otherwise deal with their assets restrained by the orders made by Hislop J in the Supreme Court of New South Wales on 25 October 2008 in proceeding No. 12212 of 2008 in the Common Law Division, without first giving 14 days' notice to the applicant. It was noted that the undertakings proffered were given severally by the third and fifth respondents. 11 At the commencement of the day on 22 May 2009 separate undertakings to the Court were formally given by the third and fifth respondents. These were as follows: (a) The third respondent by its counsel gives the following undertaking to the Court: 'Without admissions, and without prejudice to any entitlement to resist the making of a freezing order, the third respondent will take no steps which may be open to it to dispose of or otherwise deal with the assets restrained by the orders made by Hislop J on 25 October 2008 in Supreme Court of New South Wales proceeding 12212 of 2008, without first giving 14 days' notice to the applicant.' (b) The fifth respondent by its counsel gives the following undertaking to the Court: 'Without admissions, and without prejudice to any entitlement to resist the making of a freezing order, the fifth respondent will take no steps which may be open to it to dispose of or otherwise deal with the assets restrained by the orders made by Hislop J on 25 October 2008 in Supreme Court of New South Wales proceeding 12212 of 2008, without first giving 14 days' notice to the applicant.' On 5 June 2009 each of the third and fifth respondents by their counsel added to their undertakings to the Court the words 'by his solicitor, the Australian Government Solicitor (Attention Denis Stokes/Tanya Sklepic)' after the words 'notice to the applicant'. Later on the same day the undertakings were further extended to be expressed as undertakings to the Court on behalf of the third respondent, its directors and officers and, later still, on behalf of the third respondent, its directors and other officers, servants and agents in the one case and on behalf of the fifth respondent its directors and officers and, later still, on behalf of the fifth respondent, its directors and other officers, servants and agents on the other. 12 On 22 May 2009 the evidence had not concluded. In all the circumstances, freezing orders were made on that day against each of the third respondent and the fifth respondent in each case up to and including 1 June 2009. On 1 June 2009 those freezing orders were continued up to and including 5 June 2009. The restraint in respect of the third respondent precluded it from removing from Australia or in any way disposing of, dealing with or diminishing the value of any of its assets in Australia up to the unencumbered value of $A 3,597,587.90 other than to make payment to the applicant. Once again the orders were expressed to extend to assets of the third respondent outside Australia in the event that the unencumbered value of the Australian assets was less than the said amount. In those circumstances the restraint was expressed to apply to the third respondent's Australian assets and its ex-Australian assets up to the unencumbered value of the said amount. In the freezing order as made the assets of the third respondent were defined in paragraph 6(1)(c)(ii) to include 'the whole of the amounts held in the following bank accounts in New Zealand', those accounts being the same ten bank accounts in the name of the fifth respondent to which reference was made in the earlier orders against the first, second and fourth respondents. 13 The freezing orders made on 22 May 2009 against the fifth respondent up to and including 1 June 2009 and continued up to and including 5 June 2009 restrained the fifth respondent from disposing of, dealing with or diminishing the value of any of 'your Assets' and for that purpose 'your Assets' was defined to mean 'the whole of the amounts held in the following bank accounts in New Zealand' once again referring to the same ten bank accounts in the name of the fifth respondent. 14 The applicant was not content to rely upon the undertakings to the Court given by the third and fifth respondents and pressed for the making of freezing orders by the Court until further order. When challenged to explain why a freezing order would provide the applicant with more effective relief than the undertakings given to the Court, it was suggested that the freezing orders would have a character analogous to a judgment in rem so that other parties, such as the banks mentioned in the definitions of 'your assets' in the orders previously made, would be bound to observe the orders if they were served upon them. 15 Senior counsel for the applicant resiled from this position on 1 June 2009 but still maintained that the applicant would be placed in a stronger position were freezing orders to be made arguing, amongst other things, that notice of an intended withdrawal of one or other or both of the undertakings could be given to a remote office of the applicant and not come to the relevant officer's attention until, metaphorically speaking, the horse had bolted. This last mentioned concern was overcome by the addition of the words mentioned above to the third and fifth respondents' respective undertakings to the Court on 5 June 2009. 16 Pending the delivery of my reasons for judgment on the applicant's Notice of Motion filed 11 May 2009, the freezing orders have been progressively extended. On 2 July 2009 they were continued up to and including Friday 10 July 2009 or earlier order. 17 The third and fifth respondents have conceded, for the purposes of the Notice of Motion presently before the Court, that the Commissioner has shown an arguable case. The 'first limb' requirement that the applicant establish a prima facie cause of action against the respondent, has been satisfied. However, the third and fifth respondents submitted that not only was there no danger of dissipation of assets, there was absolutely no risk of dissipation. 18 It seems to me that there is something of a problem with the applicant's assertion that at one and the same time monies standing to the credit of bank accounts in the name of the fifth respondent with ANZ National Bank Limited and Bank of New Zealand can be wholly the property of the third respondent, wholly the property of the fifth respondent, and at the same time, the property of the second respondent as to $A220,000, the property of the first respondent as to $US32,142.56 and $A14,263,136.36 and the property of the fourth respondent as to like amounts namely $US32,142.56 and $A14,263,136.36. As mentioned above, there is no evidence as to the current balances of the ten bank accounts nor is there any evidence of the claims that the first, second, third or fourth respondents or others might have on the fifth respondent in respect of the moneys standing to the credit of the said accounts or otherwise. 19 The Banks are not trustees of the monies standing to the credit of the fifth respondent's accounts. Each of them is simply a debtor of the fifth respondent for the whole of the amounts standing to the credit of the accounts with them from time to time (see per Campbell J in Sutherland Re; French Caledonia Travel Service Pty Ltd (In Liq) (2003) 59 NSWLR 361 (the 'Travel Service case') at [61]). 20 In Re Hallett's Estate: Knatchbull v Hallett (1880) 13 ChD 696 ('Re Hallett's Estate') is not authority for the proposition for which the applicant contends, namely, '[t]he mixing or pooling of the monies in the New Zealand account (sic) does not create an "indistinguishable mass" which precludes equitable ownership being asserted in respect of an aliquot amount that represents the sum of monies owned by any particular person.' 21 In Re Hallett's Estate, Mr Hallett, a solicitor, acting without authority and improperly sold some Russian 5% 1822 bonds. Some of those bonds represented trust funds under a marriage settlement of Mr Hallett. Others were held by him for a client, Mrs Cotterill. The bonds had been sold by Hallett directing his bankers, Messrs Twining, to do so. Hallett had drawn monies from the account with his bankers and paid in other monies. In an action for the administration of his estate following his death, claims were made by several persons against monies in the hands of the bankers. 22 It followed from Sir George Jessel MR's reasoning in Re Hallett's Estate at 717-719, that: (a) if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own i.e. the trust property comes first; (b) so long as trust property can be traced and followed into other property into which it has been converted, that property remains subject to the trust; (c) the product of or substitute for the original thing follows the nature of the thing itself as long as it can be ascertained to be such and the right only ceases when the means of ascertainment fail. 23 The Master of the Rolls then proceeded to reject Lord Ellenborough's statement in Taylor v Plumer (1815) 3 M&S 562; (1815) 105 ER 721which followed 'the means of ascertainment fail', namely 'which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description.' The Master of the Rolls opined that in such circumstances equity could follow the money and create a charge. Employing this refinement, the means of ascertainment would, in equity, still remain. 24 In Brady v Stapleton (1952) 88 CLR 322 at 337-338 Dixon CJ and Fullagar J said, referring to Sir George Jessel's judgment in Re Hallett's Estate at 717: 'If all other means failed, said the Master of the Rolls, equity would impose a charge on the "indistinguishable mass". But, if it were a case of money, "equity would have followed the money, even if put into a bag or into an indistinguishable mass, by taking out the same quantity" … It is … in particular in the words italicized above [expressed herein in reverse type], that the solution of the present problem is to be found. For it would be a great mistake to suppose that the great case of Re Hallett's Estate … lays down a doctrine peculiar to money. On the contrary, it extends to money paid into a bank account, and so losing its identity as money, a doctrine which equity would never have had the slightest hesitation in applying to money physically existing or to any other kind of personal property to which it could, as a matter of practical possibility, be applied. And there is no difficulty, and we do not think equity would ever have had the least difficulty, in applying the same doctrine to shares or bonds.' Later at 339 Dixon CJ and Fullagar J said: 'The real distinction which equity draws is between the case where it is, and the case where it is not, practicable to give effect to the rights of the cestui que trust by appropriating to him a specific severable part of the available property.' 25 Later at 727-728 the Master of the Rolls said in Re Hallett's Estate: 'When we come to apply that principle [that where a man does an act which may be rightfully performed, he cannot say that that act was intentionally and in fact done wrongly] to the case of a trustee who has blended trust moneys with his own, it seems to me perfectly plain that he cannot be heard to say that he took away the trust money when he had a right to take away his own money. The simplest case put is the mingling of trust moneys in a bag with money of the trustee's own. Suppose he has a hundred sovereigns in a bag, and he adds to them another hundred sovereigns of his own, so that they are commingled in such a way that they cannot be distinguished, and the next day he draws out for his own purposes £100, is it tolerable for anybody to allege that what he drew out was the first £100, the trust money, and that he misappropriated it, and left his own £100 in the bag? It is obvious he must have taken away that which he had a right to take away, his own £100. What difference does it make if, instead of being in a bag, he deposits it with his banker, and then pays in other money of his own, and draws out some money for his own purposes? Could he say that he had actually drawn out anything but his own money? His money was there, and he had a right to draw it out, and why should the natural act of simply drawing out the money be attributed to anything except to his ownership of money which was at his bankers.' 26 Re Hallett's Estate says nothing about the division of monies standing to the credit of bank accounts into aliquot shares nor does it address a case such as this where it is said that there are conflicting claims to the same monies standing to the credit of the several bank accounts in the name of the fifth respondent. 27 It is instructive to consider the excellent, if I may say so, critique of Re Hallett's Estate which is to be found in the judgment of Campbell J in the Travel Service case at [43]-[65] although I am not persuaded that, as a matter of generality, coins in a bag may be treated as 'separate and individually identifiable things'. Money, like grain, is fungible and, generally speaking, indistinguishable (cf per Campbell J at [61]). However, the distinction remains between money as a chose in possession and a banker's obligation to the bank's customer, which his Honour rightly described as an inchoate chose in action. 28 As Campbell J observed at [61] when considering Re Hallett's Estate: '… the purpose of the activity that the Court of Appeal was engaged in was working out whether the defaulting solicitor could, conscientiously, deny that some of the money which remained in the bank account - the inchoate chose in action to pay the balance to the customer - was money of a particular client.' Giving emphasis to the words 'For that purpose' his Honour then said: 'For that purpose, there was no difference between a bank account, and coins from various sources placed in a bag. Functionally, the bank account and coins in the bag operated identically.' However, as Campbell J observed at [65]: 'There is no reason why the banker ought be presumed to know of, or be in any way affected by, [a] presumption of honest intention between trustee and beneficiary.' 29 It is useful to bear in mind what Dixon CJ and Fullager J said in Brady v Stapleton at 339 namely that the real distinction which equity draws is between the case where it is, and the case where it is not, practicable to give effect to the rights of a cestui que trust by appropriating to him a specific severable part of the available property. Tracing money into a bank account and obtaining a charge over an identifiable part of it may be impracticable. 30 As to how competing claims on the fifth respondent in respect of monies standing to the credit of the bank accounts with ANZ National Bank Limited and Bank of New Zealand, if there be such competing claims, are to be dealt with will, no doubt, turn on a number of facts, that are presently unknown. 31 It cannot be said that, as a matter of law, a fund in which assets of several beneficiaries have become mixed should always be distributed amongst all beneficiaries, pro rata according to their claims. Rateable abatement does not automatically apply whenever there is a mixed fund because there is a preliminary question, the answer to which cannot be assumed, of whether all the claimants on the fund, in the form the fund takes at the time of trial, have claims which are equal (see per Campbell J in the Travel Service case at [176]-[193]). 32 On 5 May 2009 a Notice of Assessment was issued to the third respondent under the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act') and the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') in respect of the year of income ending 30 June 2008. That Notice of Assessment recorded that the Commissioner had made an assessment of the amount of the taxable income of the third respondent in the sum of $1,980,080 and of the tax payable thereon, being $594,024.00. The Notice of Assessment also recorded that $1,129,991.56 was payable by the third respondent to the Commissioner from previous notices. 33 The previous notices which gave rise to the figure of $1,129,991.56 were Notices of Assessment issued on 5 May 2009 to the third respondent in respect of the years of income ended 30 June 2001, 30 June 2002, 30 June 2003, 30 June 2004, 30 June 2005, 30 June 2006 and 30 June 2007. Those Notices of Assessment recorded that the Commissioner had made assessments of the amount of the taxable income of the third respondent, and of the tax payable thereon in the years in question, as follows: Taxable income Tax payable 2001 $1,729 $587.86 2002 $7,182 $2,154.60 2003 $35,062 $10,518.60 2004 $355,563 $106,668.90 2005 $62,872 $18,861.60 2006 $697,628 $209,288.40 2007 $2,606,372 $781,911.60