Coulls v Bagot's Executor and Trustee Co Ltd

ISSUES 1HIS HONOUR: There are two questions to be determined in this case. Both arise from a deed, entitled "Heads of Agreement", which was signed by the plaintiff, Mr Jeffrey McLeary, and the defendant, Mr Martin Swift, on 27 February 2009, pursuant to which the parties' business interests were severed. 2The first question is whether, under cl 5.9 of the Heads of Agreement, the defendant is liable to pay to the Australian Taxation Office ("ATO") one half of the taxation liability (including a shortfall penalty) of Teffcog Pty Ltd ("Teffcog") for the 2006 financial year. Teffcog was, at the time the Heads of Agreement was signed, a company associated with the plaintiff and the defendant. 3The second question is whether, under cls 8.2 and 8.3 of the Heads of Agreement, the defendant must indemnify the plaintiff for one half of the amount payable to the ATO by Teffcog.

4For many years the plaintiff and the defendant conducted an air conditioning and refrigeration business known as the M & H Group. The M&H Group was made up of various corporate entities. One in particular, Teffcog, is relevant to these proceedings. The shares in Teffcog were held by the plaintiff and the defendant in equal shares. 5On 19 July 2005 the M & H Group was sold to M & H Air Conditioning Pty Ltd and the proceeds were distributed amongst the various entities in the M&H Group. Teffcog received $3.234 M from the proceeds of sale. 6In the years following the sale of the M & H Group the plaintiff and the defendant decided to separate their financial and business interests. They did so by signing the Heads of Agreement on 27 February 2009. Pursuant to the Heads of Agreement, the defendant agreed to transfer his interest in Teffcog to the plaintiff. The plaintiff is presently the sole shareholder in Teffcog. 7The Heads of Agreement contains, relevantly, the following provisions: 5. Mutual Acknowledgments The parties mutually acknowledge and agree that: 5.9 the financial statements for the Joint Entities being Annexures A, B, C, D, E and F to this Heads of Agreement will be signed by each of them as necessary and will be submitted by Davidson Accountants to the Australian Taxation Office and the Australian Securities and Investments Commission as appropriate and they further acknowledge and agree that they will each be liable for one half of the taxation liability assessed as payable by the Australian Taxation Office for the Joint Entities up to an[d] including the financial year ended 30th June 2008. Upon receipt of the assessment issued by the Australian Taxation Office ("ATO") Jeffrey must cause a copy of the assessment to provided to Martin promptly and upon receipt of the ATO assessment Martin will be liable to pay one half of the assessment as a debt due and payable by not later than the due date for payment allowed by the ATO. 8. Indemnity 8.2 For a period of three (3) years after the Completion date, and, subject to sub-clause 8.3 Martin agrees to indemnify Jeffrey for up to one half of any fines or penalties that may be imposed on any of the Joint Entities arising out of any ATO audit conducted in respect of the activities of the Joint Entities prior to the Completion date PROVIDED that Martin will be at liberty to make any submissions he or his advisors deem appropriate to the ATO in respect of any fines or penalties imposed or sought to be imposed by the ATO, it being acknowledged that such submissions may be made by Davidson Accountants on Martin's behalf by reason of Davidson Accountants having prepared and lodged the financial statements in respect of the Joint Entities for the relevant periods. 8.3 The indemnity in sub-clause 8.2 does not extend to any fines or penalties levied or imposed on any of the Joint Entities by the ATO by reason of Jeffrey not meeting the requirements of the retirement exemption provisions of the small business capital gains tax rollover relief arising from the sale in 2005 by Teffcog Pty Ltd of the business known as M&H Air Conditioning. 8The Joint Entities were defined in the Heads of Agreement as Teffcog Pty Ltd ACN 050 053 980 and that company in its capacity as trustee for certain unit trusts. 9On 1 October 2007, the ATO issued a Notice of assessment for the 2006 financial year in relation to Teffcog in the sum of $103,529. 10On 4 November 2008 the ATO issued a Notice of audit in relation to Teffcog's tax liability in the 2006 financial year. The audit focused on concessions that had been claimed in order to reduce Teffcog's capital gain tax liability arising from the consideration received from the sale of the M & H Group. 11As a result of the audit, on 15 July 2010 the ATO issued a Notice of amended assessment (the "amended assessment") for an additional amount of $970,200. On the same date the ATO also issued a Notice of assessment of shortfall penalty for the sum of $485,100. 12The plaintiff arranged for payments to the ATO to be made through entities he controlled. In fact, payments were made by the McLeary Family Trust ("the Trust") out of distributions debited in the books of the Trust to Teffcog, that company being a beneficiary of the Trust. The defendant has not made any payment towards Teffcog's taxation liability arising out of the amended assessment in spite of requests to do so. 13The plaintiff claims that the defendant has breached cl 5.9 of the Heads of Agreement by failing to meet his share of the tax assessed, as well his share of the shortfall penalty. (At the hearing the defendant's counsel accepted that the shortfall penalty falls within the ambit of cl 5.9). The plaintiff seeks specific performance of this obligation or, in the alternative, damages. 14The defendant denies that the plaintiff is entitled to relief arising out of his breach of cl 5.9. He asserts that specific performance cannot be ordered. He asserts also that damages cannot flow to the plaintiff because the benefit of the contract flows to Teffcog and Teffcog is not a party to the proceedings. 15In addition to the claim under cl 5.9, the plaintiff claims an indemnity, pursuant to cl 8.2, for one half of the amount due to the ATO ("the indemnity claim"). As this claim can be readily dealt with, I turn first to it. 16The defendant submits that the indemnity only arises upon complete payment by the plaintiff of the debt. The only payments made have been made by Star Mend (a company in which the plaintiff is the sole shareholder) as trustee of the Trust. In the books of the Trust, these payments have been treated as distributions to Teffcog, that company being one of the beneficiaries under the Trust. Thus, it is argued, the plaintiff is not entitled to relief because the plaintiff himself has not made any payments to the ATO. 17In response, Mr Corsaro SC, for the plaintiff, submitted that the reference to "Jeffrey" in cl 8.2 is not limited to the plaintiff in his personal capacity, but must be construed to mean the plaintiff and his interests in various entities, including the Trust, so that the plaintiff has made the requisite payments. 18There is no possible basis for this argument. The wording of cl 8.2 is clear and there is no reason to give "Jeffrey" an extended meaning. The provision of an indemnity "is an undertaking to reimburse the guarantor upon the happening of a contingency, viz, the payment by the guarantor to the creditor, and until that contingency occurs, there is no debt": Re A Debtor [1937] Ch 156 at 163-4 (per Greene LJ); Re Last; Ex parte Butterell (1994) 124 ALR 219 at 222. As the plaintiff has not personally paid the requisite amounts to the ATO, he is not entitled to claim against the indemnity in cl 8.2 of the Heads of Agreement.