REASONS FOR JUDGMENT
1 This is an ex parte application brought by the Commissioner of Taxation for freezing orders and associated interlocutory orders.
2 The originating application seeks a declaration that the first respondent is indebted to the Commissioner in the sum of $12,783,976.50 pursuant to a tax debt which is due but not yet payable. There are three respondents to the application. The first respondent is Regent Pacific Group Limited, a company incorporated in the Cayman Islands and whose shares are listed on the Hong Kong Stock Exchange. The second respondent is Sun Hung Kai Investment Services Ltd, a company incorporated in Hong Kong. The third respondent is NEFCO Nominees Pty Ltd, a company incorporated in Australia.
3 The originating application is founded on the fact that on 21 January 2013, the Commissioner issued a notice of assessment under s 168 of the Income Tax Assessment Act 1936 (Cth) in the sum of $12,783,976.50 in respect of a capital gain which the Commissioner alleges the first respondent has made from the sale of shares which it held in BC Iron Limited, a company engaged in mining operations in the north of Western Australia.
4 The notice of assessment provides that the time for the payment of the tax debt is 2 December 2013 - some 11 months hence.
5 At the same time that the notice of assessment was issued, a letter was sent to the first respondent, enclosing the reasons for making the assessment. The reasons relevantly state:
Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes net capital gains for an income year.
However section 855-10 of the ITAA 1997 provides that a foreign resident can disregard a capital gain or capital loss arising from a CGT event happening in regards to a CGT asset unless that CGT asset is taxable Australian property.
Section 855-20 of the ITAA 1997 states that a CGT asset is taxable Australian real property if it is real property situated in Australia or a mining, quarrying or prospecting right in Australia.
Under item 2 of the table in section 855-15 of the ITAA 1997, a CGT asset that is an indirect Australian real property interest is taxable Australian property.
It has been determined that the BC Iron Limited shares disposed of by Regent Pacific Group Limited are taxable Australian property under item 2 of the table in section 855-15 of the ITAA 1997. As your shareholding in BC Iron Limited was greater than 10% the capital gain arising from this transaction is not disregarded under section 855-10 of the ITAA 1997. (Original emphasis.)
6 The evidence also discloses that the first respondent holds, through nominee companies, shares in four Australian companies whose shares are listed on the Australian Stock Exchange, to the total value, as at 18 January 2013, of $20,844,100. The companies are Bannerman Resources Ltd, Drake Resources Limited, Tigers Realm Coal Limited and Venturex Resources Limited. The shares in Venturex Resources Limited are held through the second respondent, and the shares in Drake Resources Limited, Tigers Realm Coal Limited and Bannerman Resources Ltd are held through the third respondent. These shareholdings are the only assets which the first respondent has in Australia. By this interlocutory application, the Commissioner seeks to enjoin the first respondent's dealing, through its nominee companies, in these shares.
7 I now deal with the matters in respect of which the Court must be satisfied in relation to the making of freezing orders.
8 First, I am satisfied that the Court has jurisdiction to entertain an application in relation to a declaration of a tax debt.
9 Secondly, I am satisfied that the Commissioner has a reasonably arguable case on the basis of the evidence of the issue of a notice of assessment and the operation of s 177 of the Income Tax Assessment Act and s 298-30(3) of Sch 1 of the Taxation Administration Act (1953) (Cth).
10 There is also authority that a freezing order can be made even though the time for the payment of the tax debt has not yet arisen, provided, of course, that the other requirements are met (Deputy Commissioner of Taxation v Sharp (1988) 91 FLR 70).
11 The Court must be satisfied of the matters in r 7.35(4) of the Federal Court Rules 2011 (the Rules), namely, that there is a danger that the prospective judgment will be wholly or partially unsatisfied. A freezing order can be granted even though there is no evidence that there is a positive intention to frustrate a judgment. I was taken to the following observations of Kenny J in Deputy Commissioner of Taxation v Hua Wang Bank Berhad (2011) 273 ALR 194 at [10], which I adopt:
A freezing order may be granted even though there is no evidence of the respondent's positive intention to frustrate a judgment: see National Australia Bank Ltd v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277…per Mason CJ, Brennan and Deane JJ; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380…; Glenwood at 53 per Young CJ; and Riley McKay Pty Ltd v McKay [1982] 1 NSWLR 264 ("Riley McKay") at 276. In Riley McKay at 276, the Court of Appeal of the New South Wales Supreme Court said, and I accept, that the jurisdictional basis for relief of this kind "is directed to dispositions…which are intended to frustrate, or have the necessary effect of frustrating, the plaintiff in his attempt to seek through the court a remedy for the obligation to which he claims the defendant is subject"…In this case, there is no direct evidence of positive intention on the respondents' part to frustrate a judgment. None the less, the Commissioner argues that there is a danger of the removal of assets from the jurisdiction, which would have the effect of frustrating any judgment. (Original emphasis. Footnotes omitted.)
12 The Commissioner relied upon the following facts and matters to support the drawing of an inference by the Court that there is a danger that in the event that the freezing orders are not made, the assets which comprise shares held in Australian companies will be removed from Australia, with the effect that any judgment obtained by the Commissioner in respect of the tax debt will be unsatisfied.
13 First, the Commissioner pointed to the liquid nature of the first respondent's assets in Australia, being shares traded on the Australian Stock Exchange. The concern of the Commissioner is that, in the event that the freezing and associated interlocutory orders are not made, it would be very easy for the shares to be sold and the proceeds transmitted elsewhere. In support of this concern the Commissioner pointed to the fact that the disposal of the shares in BC Iron Limited occurred entirely offshore, with no funds passing through Australia. Further, the Commissioner emphasises that the first respondent has no other assets in the jurisdiction.
14 Secondly, the Commissioner referred to the fact that the first respondent had not registered for a tax file number and has never filed any tax returns in Australia. The Commissioner said that this meant that the first respondent did not have any tax history in Australia, and there was no basis, therefore, upon which to have confidence that any judgment would be met.
15 Thirdly, the Commissioner drew attention to the fact that the first respondent is registered in the Cayman Islands and has a business office in Hong Kong, and neither the Cayman Islands nor the People's Republic of China has a bilateral collection policy or process with Australia. There is also evidence that, although the Cayman Islands is a member of UNCITRAL, it has not adopted a provision relating to the recognition of foreign revenue debts, and the People's Republic of China is not a member of UNCITRAL, and that the laws of neither the Cayman Islands nor the People's Republic of China recognise foreign revenue debts.
16 Fourthly, the Commissioner referred to the fact that the tax debt is for a significant sum of approximately $12.7 million, and that the tax debt is not payable for some 11 months. The Commissioner contended that by reason of the combination of those two factors, as well as the lack of any tax history in Australia, the first respondent may well remove assets from Australia before any judgment is given, with the consequence that the Commissioner would not be able to satisfy any successful judgment against the first respondent.
17 I am satisfied that these facts and circumstances are sufficient to support an inference that there is a danger that the failure to make freezing orders will have the effect of the Commissioner not being able to recover from the first respondent on a successful judgment for the tax debt in his favour.
18 The next question is the balance of convenience. The balance of convenience raises the factor that the first respondent is a company, which invests in shares, and that the interlocutory orders sought, seek to restrain the trading in shares. I am mindful, therefore, that in weighing the balance of convenience, that this factor is to be given some considerable weight.
19 Against that factor are to be weighed the factors which I have already mentioned in relation to the danger of dissipation of the assets, and also the fact that the Commissioner has given an undertaking as to damages.
20 I am content, at least on an interim basis, that the balance of convenience favours the making of the interlocutory orders because this matter will be returnable to the Court on 31 January 2013. The restriction on the trading of the shares will, therefore, be for a relatively short period of time before the respondents will have an opportunity to oppose the continuation of those orders.
21 For the reasons set out above, I am content to make the interlocutory orders which restrict the second and third respondents from trading in the shares specified in those orders, and also to make the freezing orders.
22 The next question is leave to serve the originating process out of the jurisdiction.
23 I am satisfied that the requirements of the Rules have been satisfied in relation to the orders sought for leave to serve the first and second respondents out of the jurisdiction. The proceeding is plainly of a kind which is within r 10.42 of the Rules. The Court clearly has jurisdiction. On the basis of having issued the 21 January notice of assessment and the statutory provisions to which I have referred, I am satisfied that the Commissioner has a prima facie case in respect of the relief claimed. The service mode which the Commissioner has nominated for service on the first and second respondents is service in accordance with the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (The Hague, 15 November 1965).
24 I am satisfied that the orders sought for service out of the jurisdiction should be made.
25 The next question is whether there should be substituted service under r 10.24 of the Rules.
26 In my view, this is a case where it is not practicable to rely only upon the ordinary mode of service under the Rules, as being the sole mode of service upon the first and second respondents. The Draconian nature of the freezing and associated interlocutory orders, renders it important that this proceeding and these orders be brought to the attention of the first and second respondents as quickly as possible so that they may have an opportunity to oppose, at the earliest opportunity, the continuation of the orders (Rohalo Pharmaceutical Pty Limited v RP Scherer SpA (1994) 15 ACSR 347; Deputy Commissioner of Taxation v Seabrooke [2012] FCA 1158).
27 Accordingly, the orders sought for substituted service should be made.
28 In those circumstances, I will make orders in terms of the amended minute which I discussed with counsel for the Commissioner.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.