Deputy Commissioner of Taxation v Bollands

Federal Court of Australia|2012-09-24|Before: McKerracher J

Within 10 days, the applicant and first respondent file an agreed minute or, alternatively, competing minutes of proposed orders reflecting these reasons for judgment. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 101 of 2012

RESIDENCE RIVERSIDE PTY LTD AS TRUSTEE OF THE D & J DISCRETIONARY TRUST AND AS TRUSTEE OF THE D & J INVESTMENT TRUST (ACN 155 903 209)

JUDGE: MCKERRACHER J DATE: 24 SEPTEMBER 2012 PLACE: PERTH

introduction 1 By interlocutory application filed on 8 June 2012, the first respondent (Mr Bollands) seeks variations to freezing orders I made on 18 April 2012 (the freezing orders). The variation sought is to permit Mr Bollands to deal with one of his Australian assets which is the subject of the orders. The asset concerned is a loan of some AUD1,886,414.00 he has made to the D & J Investment Trust. The sole purpose of access to these funds, if approved by its trustee, is to enable Mr Bollands to pay his reasonable legal expenses. There are consequential variations to the freezing orders made against the assets of the fourth respondent (Residence Riverside Pty Ltd as Trustee of the D & J Discretionary Trust and as Trustee of the D & J Investment Trust) (the Trustees). In essence the orders sought by Mr Bollands would allow him to issue demands to the Trustees for payment of his legal fees. 2 On 26 July 2012 consent orders were made entering judgment for the Commissioner against Mr Bollands in the sum of AUD11,847,051.72 (the judgment debt). However, the underlying basis for the judgment remains very much contested. Many complex issues are still to be resolved. 3 The application for a variation of the orders is opposed by the applicant (the Commissioner). For the Commissioner, it is contended that the evidence relied upon by Mr Bollands does not establish that he cannot fund his reasonable legal costs by use of income and other assets at his disposal. Secondly, the application is opposed as the variations sought "would have little utility" because of the existence of garnishee notices dated 30 March 2012.

background 4 The original freezing orders were made on 18 April 2012. On 1 June 2012, Mr Bollands filed an affidavit, as required, deposing to all his assets worldwide (the Assets Affidavit). Within the freezing orders originally made, an exception was provided for Mr Bollands to pay his ordinary living and legal expenses (para 9(a) and para 9(b) respectively). That exception accorded with the Court's usual procedure as outlined in Practice Note CM9 (para 12(a) and para 12(b) respectively). 5 The Assets Affidavit discloses that his principal assets are various loans owing to him from the D & J Investment Trust, the D & J Discretionary Trust and what is known as the Goode Beach Properties Trust. 6 The most substantial asset is the sum of AUD1,886,414.00 owed by the D & J Investment Trust to Mr Bollands alone. Mr Bollands' contention that the affidavit also establishes that he only has very minor assets not the subject of freezing orders is disputed by the Commissioner. 7 On 5 June 2012, King & Wood Mallesons (KWM), solicitors for Mr Bollands, wrote to the Australian Government Solicitor (AGS) for the Commissioner requesting a variation to the freezing orders so as to permit Mr Bollands access to funds for the purpose of payment of reasonable legal expenses. It was stated that those legal expenses would include the costs of the proceeding, the associated Pt IVC taxation objections and, if necessary, Pt IVC proceedings and any appeal therefrom either by Mr Bollands or the Commissioner. The consent of the Commissioner was sought to vary the freezing orders so as to permit Mr Bollands to make demands from time-to-time to the Trustee to meet legal accounts. 8 Mr Bollands contends that the evidence filed by his solicitor establishes that: (a) Mr Bollands' only remaining substantial assets are located in Australia and consist of loans he has made to three trusts, either in his own name or jointly with his ex-wife, these loans being subject to freezing orders made by this Court; (b) Mr Bollands has pledged his only substantial asset located outside of Australia, namely, 150 shares in GRS Group Ltd as security for an AUD150,000 loan to be make on his behalf, the proceeds of which will be used for the purpose of his legal expenses; (c) Mr Bollands otherwise has assets of only comparatively minor value located outside of Australia; and (d) Mr Bollands' principal asset within Australia consists of a loan AUD1,886,414 made by him solely to the Trustee of the D & J Investment Trust. 9 In addition to relying on the Assets Affidavit, Mr Bollands relies on two affidavits sworn by Mr David Wood, a partner of KWM. Mr Wood deposes that in April 2012 a Hong Kong member of KWM was engaged by Mr Bollands in respect of these proceedings and his dispute with the Commissioner in respect of his taxation affairs. About the same time the Australian member of KWM was engaged by the Hong Kong member firm of KWM in respect of those matters. Mr Wood was informed by Mr Dennis Brock, partner of the Hong Kong KWM member firm responsible for the care and conduct of Mr Bollands' matters, and believes that on 27 April 2012 the Hong Kong equivalent of AUD150,000 was paid into the firm's trust account on behalf of Mr Bollands as payment of his future legal expenses in relation to the matter. Mr Wood believes that the sum was the proceeds of a loan obtained by Mr Bollands from a fellow shareholder secured by way of a pledge over Mr Bollands' 150 shares in GRS Group Ltd. Until 8 June, when the affidavit was sworn, costs for legal services as rendered by the Australian firm were AUD56,288 excluding counsel fees. At that date counsel were still to render fee notes for their services. Mr Wood estimates that Mr Bollands' future legal expenses will be between AUD150,000 and AUD250,000, but if the dispute with the Commissioner does not resolve at the objection stage, he anticipates that further substantial legal expense would be incurred in prosecuting Pt IVC proceedings. Mr Wood explains in a general way how those fees were arrived at and emphasises that the fees have been rendered in respect of participation in these proceedings including: (a) preparation for, and appearance at, the interlocutory hearing on 11 June 2012 and the hearing of further interlocutory applications; (b) negotiations and correspondence with the Commissioner in relation to Mr Bollands' objections against the amended assessments and penalty assessments issued by the Commissioner against Mr Bollands, giving rise the judgment debt. 10 Mr Wood deposes that this will involve: (a) reviewing the materials that have been provided by the Commissioner and by, or on behalf of, Mr Bollands comprising over 2,500 pages; (b) responding to the complex legal arguments asserted by the Commissioner in his 35 page position paper of 20 January 2012 and attending meetings and or conferences with officers employed by the Commissioner. 11 The financial position of Mr Bollands in relation to income and living expenses is such that: (a) He is employed by GRS Group Ltd and in respect of that employment: (i) he receives a gross salary of HKD85,000 per month; (ii) for the Hong Kong year of income ended 31 March 2012, he also received bonuses totalling HKD127,500; (iii) he is supplied with accommodation and a number of flights to Australia each year by his employer, but these are not convertible to cash; and (iv) his average Hong Kong tax rate is approximately 15%. (b) His living expenses, including the cost of his children's maintenance and education, total approximately HKD45,500 per month. 12 Following notification of the Commissioner's opposition to Mr Bollands' interlocutory application, Mr Wood swore a further affidavit on 29 August 2012 in which he annexed the Commissioner's Practice Statement Law Administration PS LA 2011/18, relating to "enforcement measures used for the collection and recovery of tax related liabilities and other amounts". He also annexed the correspondence with the Commissioner and AGS concerning access to funding for payment of legal fees and correspondence in relation to objection against assessments. He gave further evidence as to the updated position concerning legal expenses incurred, showing that as at 31 July 2012 Mr Bollands had received invoices for costs of legal services and disbursements in respect of the matters under dispute of HKD1,512,195, about AUD187,859. Costs for legal services provided by the Australian member firm of KWM during the period of 1 August to 29 August 2012 were in excess of AUD36,000 and costs for legal counsel from 20 July to 31 July 2012 were AUD6,750. Counsel fees for the full month of August 2012 were not included in those sums. Mr Wood estimates that the potential costs of judicial review proceedings and Pt IVC proceedings (at first instance) could together total as much as AUD450,000.

SUFFICIENCY OF EVIDENCE AS TO assetS 13 The Commissioner also relies upon an affidavit of Ms Carla Kovacevic of AGS sworn on 30 August 2012. Ms Kovacevic deposes that she emailed Mr Wood on 6 July 2012, enclosing inter alia, two AUSTRACK reports and correspondence in which it was asserted that Mr Bollands had sent AUD606,050 to himself via a Jersey account on 23 November 2004. There was reference also to a transfer on 16 December 2011 via electronic funds transfer from Global Resource Solutions AU Pty Ltd to GRS Group Ltd with the details "/RFB/f112169514110 DB Dividend". It was suggested that these sums totalling in excess of AUD1,500,000 had not been accounted for adequately or at all in the disclosure of assets and liabilities. The Commissioner maintains that position in opposing the relief sought. 14 The Commissioner refers to the Assets Affidavit and contends in written submissions filed on 30 August 2012 that the information contained in the Assets Affidavit is unreliable. In particular, the Commissioner refers to the evidence of Mr Bollands that he owns 150 shares in the GRS Group Ltd which Mr Bollands asserts are worth USD160,000. As to that, the Commissioner says that the assertion can be given no weight as it is mere assertion with no foundation. No admissible evidence has been provided that the value of the shares is limited to that sum or whether and, if so, what dividends have been paid on the shares or are likely to be paid in the future. No evidence has been put on as to what sum could be raised by selling the shares. Absent evidence of that nature, it is argued, the Court could not conclude that Mr Bollands is unable to fund his reasonable legal costs from his other assets. 15 In relation to the AUSTRACK evidence, the Commissioner submits that on 16 December 2011, the sum of AUD939,905 was shown as having been transferred in the manner discussed above. The point is made that DB are Mr Bollands' initials. In correspondence, Mr Bollands' solicitors have said that their instructions are that their client did not receive, nor was he entitled to receive, any of the transferred funds but no other explanation of the matter has been provided. In relation to that, the Commissioner points to the fact that Mr Bollands is a director of the sender of the funds, Global Resource Solutions Pty Ltd, and also one of two directors of GRS Group Ltd, the recipient of the funds. The Commissioner contends that Mr Bollands has the ability to borrow the funds from GRS Group Ltd and/or from his fellow shareholder in GRS Group Ltd. At the very least there is no evidence that Mr Bollands does not have the ability to borrow funds to pay legal expenses. The Commissioner argues in that regard that by letter dated 29 August 2012, Mr Bollands' solicitor advised, amongst other things, that in or around November 2010 Mr Bollands closed his overdraft facility of USD1.8 million with the HSBC and "refinanced his borrowings under the HSBC overdraft facility by borrowing monies from his employer under a revolving staff credit facility". The Commissioner asserts that the amount drawn down under the facility is approximately AUD972,000 but no information is provided as to the limit of the facility. In addition, the letter states first, that Mr Bollands' employer has lent him funds in addition to the staff credit facility to pay his family law solicitors. Mr Bollands has also been able to borrow funds from his fellow shareholder in GRS Global Ltd against the security of his shares. There is no evidence, it is said, that those borrowings represent the limit of the funds that could be raised by Mr Bollands using that security.

reasonable legal costs 16 The Commissioner also expresses the concern that the evidence put on in relation to legal costs to date and reasonable legal costs for the future is vague and lacking in particularity. No information has been provided as to rates charged or proposed to be charged or time spent or proposed to be spent. There is no information as to the standard to be applied in respect of reasonableness of the fees. Having regard to what has occurred so far in the proceedings and in the absence of any explanation of charges to date, the Commissioner contends the amount spent raises the question as to the reasonableness of the fees. It is also not clear what the fees relate to and whether they are solely in respect of this action and the objection. So far as the present action is concerned, the Commissioner contends that the involvement of Mr Bollands has been relatively limited. The Commissioner also argues that as he now has judgment in the matter there is no real work remaining to be done in the action. Similarly, the Commissioner submits that the objection has been lodged and, accordingly, no substantial work remains to be done unless and until the objection is dealt with. In those circumstances, it is submitted that there is no evidence as to present need for further funds for legal expenses. Accordingly, the Commissioner says there is no basis to release funds to repay the loan said to have been obtained to pay legal fees to date. He submits that there is no reason why that creditor of Mr Bollands should be heard over the Commissioner who has judgment as that creditor is said to be secured by a pledge of the shares in the GRS Group Ltd.

UTILITY OF ORDERS 17 A further difficulty is the existence of garnishee notices. The Commissioner issued garnishee notices on 30 March 2012 under and pursuant to s 260-5 in Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA 1953). Those notices were issued to the fourth respondent, being Residence Riverside Pty Ltd as Trustee of the D & J Discretionary Trust and as Trustee of the D & J Investment Trust. Mr Bollands has made loans to both trusts, the Discretionary Trust and the Investment Trust. He has made them on his own and jointly with the second respondent (Mrs Bollands) in both charts and accounts provided in evidence. The garnishee notices operate on those loans. The Commissioner makes the point that on 26 June 2012, judgment was entered in this proceeding against Mr Bollands. Although the Commissioner undertook not to enforce the judgment debt until the conclusion of any Pt IVC proceedings, that undertaking was given expressly without prejudice to the Commissioner taking any action to recover or/and enforce compliance with the garnishee notices. It is therefore submitted that the orders sought would be futile.

consideration 18 In my view, as a matter of principle, Mr Bollands is entitled to have access to reasonable funds in order to meet reasonable expenses. That said, I accept the Commissioner's submission that the evidence to date is, perhaps inevitably, unclear as to the extent of funding required and available. I also accept the submission from Mr Bollands, as discussed below, that it is not for the Court to sit over the shoulder of his solicitors to make sure that they are charging appropriately for the work which is being carried out. As responsible officers of the Court, as they no doubt are, they will exercise their ethical duties with care. In this regard, I note the submission from the Commissioner that Mr Bollands' surplus income of HKD5,000 per month after expenses can go towards the reasonable fees and disbursements to be properly incurred in advising, drafting and representing Mr Bollands in these highly complex matters. I accept the submission for Mr Bollands that substantially more will be required. 19 In my view, a balance needs to be reached between the competing considerations and in order to reach an appropriate practical balance it is helpful to review the principles which flow from the authorities discussed below. 20 As Mr Bollands points out, the purpose of the freezing order is to prevent frustration or abuse of the processes of the Court, not to provide security in respect of a judgment or order: Commissioner of Taxation v Hua Wang Bank Berhad (2010) 273 ALR 194 (at [5]) per Kenny J. 21 There is no reason to think that the approach in this Court differs in point of principle from that expressed in the Supreme Court of Victoria in Deputy Commissioner of Taxation v Karas & Ors [2012] VSC 68 (at [17]-[20]) per Kaye J (footnotes omitted): 17 First, the purpose of a freezing order under order 37A.02 is to prevent the frustration or inhibition of the court's processes by seeking to meet a danger that a judgment or a prospective judgment of the court will not be wholly or partly satisfied. 18 Secondly, it is recognised that such an order constitutes a significant interference with the rights of the persons against whom the order is made. Thus, at each stage of the supervision of such an order, the court must ensure that the reach of the order is no greater than that which is necessary to protect the processes of the court. In particular, it is necessary that the court, in determining an application such as this, ensure that the freezing order does not constitute an instrument of unfair oppression to the party in respect of whose assets the freezing order has been made. 19 The third principle is that, ordinarily, freezing orders, as they have done in this case, allow the person, against whom the orders are made, to have reasonable access to its assets, in order to be able to pay any reasonable legal fees, particularly any fees associated with litigation in respect of the debt or transaction which is the basis of the freezing order. 20 Fourthly, in his reasons for judgment on 23 December, Bell J identified two other important matters. They are, first, that a freezing order is not an order for the appointment of the plaintiff as the de facto administrator of the defendants' business or assets. Secondly, and allied to that, if there is a basis for thinking that a defendant might have access to other sources of funds within its control, nonetheless that cannot justify seeking, in an application such as this, legal discovery of documents, or making detailed requests for the provision of information, which take the matter well beyond the scope of the type of application with which I am concerned. 22 I would regard the general default position as being that a freezing order should expressly make provision for the paying of reasonable legal expenses. Clearly the rationale behind this is that any person the subject of a freezing order should not be deprived of reasonable legal advice to contest the merits of the substantive claim against which the order is based. The same logic follows in respect of a Mareva order, as noted by Barrett J in Goumas v McIntosh [2002] NSWSC 713 (at [27]), where his Honour said: It has been said repeatedly by the courts that a Mareva order must not operate as a form of de facto security for the applicants' claims and that the sole purpose is to prevent illegitimate dissipation of assets that will otherwise be available to meet any judgment. I say 'illegitimate' dissipation to emphasise that to deny access to funds needed for ordinary living purposes or to fund the conduct of the very litigation the integrity of which the order is designed to protect goes beyond the proper protective province of the jurisdiction and causes the order sought to be a means of exerting pressure foreign to the underlying purpose. 23 As the Commissioner points out, there is already provision in this freezing order for Mr Bollands to meet legal expenses with funds which may be available within the frozen fund. However, in the present circumstances, it is necessary to call upon a loan which he has made, rather than on cash owned by him. It is difficult to discern any point of principle which would require that a person be placed in a more prejudicial position, concerning access to resources to meet legal fees simply by reason of the need to attempt to call on a loan, rather than to access frozen funds. 24 Mr Bollands submits that I should not impose any monetary limit or other restraint in relation to the orders which are made. In this regard, he relies on the observations made by the majority in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 (at [50]) (footnotes omitted): … the development of this ancillary jurisdiction to grant Mareva orders has been an evolving process and the courts have approached the different factual situations as they have arisen "flexibly". There is a temptation to use the term "flexible" to cloak a lack of analytical rigour and to escape the need to find a doctrinal and principled basis for orders that are made. There are significant differences between an order protective of the court's process set in train against a party to an action, including the efficacy of execution available to a judgment creditor, and an order extending to the property of persons who are not parties and who cannot be shown to have frustrated, actually or prospectively, the administration of justice. It has been truly said that a Mareva order does not deprive the party subject to its restraint either of title to or possession of the assets to which the order extends. Nor does the order improve the position of claimants in an insolvency of the judgment debtor. It operates in personam and not as an attachment. Nevertheless, those statements should not obscure the reality that the granting of a Mareva order is bound to have a significant impact on the property of the person against whom it is made: in a practical sense it operates as a very tight "negative pledge" species of security over property, to which the contempt sanction is attached. It requires a high degree of caution on the part of a court invited to make an order of that kind. An order lightly or wrongly granted may have a capacity to impair or restrict commerce just as much as one appropriately granted may facilitate and ensure its due conduct. 25 An approach similar to this had been taken by Neuberger J, as his Lordship then was, in The Anglo-Eastern Trust Ltd v Kermanshahchi [2002] EWHC 3152 (Ch) (at [4]-[10], particularly at [7], [9] and [10]): 7 It seems to me as a matter of principle, as a matter of the wording of the order, and in the light of the authorities which I referred to last time, that the normal course in a case such as this, where a freezing order of a non-proprietary nature has been obtained in favour of the claimant, is to permit the defendant, without any express limitation, to spend a reasonable sum on his legal costs and, at least, in relation to the litigation which has given rise to the freezing order, without any substantial strings, save that the defendant's solicitors have to provide what has been called, in Halifax PLC v. Chandler [2001] EWCA SIV 1750 , para.9, "a self-certificate of their reasonable costs". Such self-certification was adopted by Park J. in that case, was not challenged on appeal, and appears to have been, at the very least, not disapproved of by the Court of Appeal. … 9 In my view, it is important, as a matter of principle, to bear in mind that a freezing order in a non-proprietary case is merely to prevent dissipation of assets. It is not intended to give the claimants the special and privileged status of a secured creditor. They can only achieve that status after judgment, if they obtain a charging order absolute. It is certainly not normally even the indirect purpose of a freezing order to prevent a defendant from defending himself in the very proceedings in which the freezing order is made. 10 It is undesirable for the claimant or the court, in the course of hostile litigation, to take up time and to invade the relationship between the defendant and his solicitor, by enquiring about, or challenging, save where it is necessary, the costs that the defendant is incurring. It would be unfair on the defendant to put him in the position of having a solicitor who is looking over his shoulder and worrying all the time about how much is being spent. Furthermore, the solicitor is an officer of the court, and should know that the defendant can only be required to pay reasonable costs, and any order made today will reflect that. Indeed, Mr. Richard Slade of Bracher Rawlins, the defendant's solicitors, accepts that. (emphasis added) 26 It has been made clear that Mr Bollands would also be willing to accept, as a condition of the variation sought, a self-certification process by his solicitors. His submissions to that effect are signed by Mr Wood on behalf of Counsel, on behalf of Mr Bollands and on behalf of Mr Bollands' solicitors. 27 In my view there is some force in the vagueness of information as to assets, income and probable legal fees. The late complaint as to the value of some of the assets (such as the 150 shares in the GRS Group Ltd) might have been cured with earlier notice. I do not ignore that complaint but give it less weight than the Commissioner suggests. The fees estimate is very difficult. The nature of the dispute (and I have been taken to the details which I do not repeat) is undoubtedly one of considerable complexity to put it mildly. There is a large sum at stake and no doubt endeavours on both sides will be concerted. 28 I consider therefore that the practical balance between the competing considerations should be achieved by going a little further than self-certification. I propose to order that there be a self-certification regime for the reasons considered in the authorities I have just discussed. However, and notwithstanding that I accept the issues raise under the objection appear to be extremely complex, it does not seem unreasonable to take a slightly more measured approach in circumstances where the amount of legal fees could be very substantial. Notwithstanding what I accept to be entirely legitimate and appropriate current estimates of potential legal fees for all the work involved in the tax issues, experience in litigation and commercial matters generally shows that what might be the position today could change significantly in six months time. In those circumstances, I conclude that the three measure which should be taken to arrive at a balance are: (a) There be self-certification by the solicitors; (b) There be a limit imposed of up to a total of AUD250,000 in the first instance; and (c) There be liberty to apply to any party affected by these orders to approach the Court for a variation of the orders in any respect. 29 Although there is usually liberty to apply to vary an order, I emphasise that the specific purpose is to cater for changing circumstances as time moves on. 30 Finally, as to the second issue, I accept Mr Bollands' submissions that whether or not it is the case that the garnishee notices or decisions of the Trustee may thwart this relief, a variation has the utility to Mr Bollands in removing one obstacle to his access to those funds. Further, the fact that the Court has considered that such a variation should be made may be a relevant matter for the Commissioner to consider in response to a separate request made by Mr Bollands of the Commissioner in accordance with para 65 of its published Policy referred to above. This request is to vary the garnishee notices so that if the Court makes variations as sought by Mr Bollands (or other similar variations), as I am inclined to do, then the Commissioner would not seek to apply the garnishee notices to those funds. Of course, I am not determining that issue for the Commissioner but I can see that the views considered above are capable of being taken into account by the Commissioner. Moreover and as a separate consideration, one would expect that a trustee acting responsibly would also take into account the reasonableness of access to funds for the purpose of meeting reasonable legal fees, although I emphasise that such a consideration is but one matter the Trustee would take into account.

CONCLUSION 31 Finally, I stress lest there be any doubt, that my conclusion on this issue is reached entirely without regard to the merits of the parties' positions on the substantive dispute. That determination is most certainly an entirely separate consideration for others on another day. 32 I will direct that Mr Bollands and the Commissioner prepare a minute to reflect the outcome adverted to in these reasons. If agreement as to the detail is not reached, it can be resolved on the papers. In relation to costs, although the Commissioner has made some good points, it seems to me that costs should follow the event and that Mr Bollands is entitled to his costs of the opposed application. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

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