Deputy Commissioner of Taxation v Eskdale South Cattle Company Pty Ltd, in the matter of Eskdale South Cattle Company Pty Ltd

Deputy Commissioner of Taxation v Eskdale South Cattle Company Pty Ltd, in the matter of Eskdale South Cattle Company Pty Ltd - [2013] FCA 740 - FCA 2013 case summary — Zoe

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REASONS FOR JUDGMENT 1 Before the Court are two interlocutory applications filed by the Deputy Commissioner of Taxation, each seeking the appointment of a provisional liquidator to a company pursuant to s 472(2) of the Corporations Act 2001 (Cth) ("Corporations Act"). Materially in both matters the plaintiff, the Deputy Commissioner of Taxation, seeks the following orders: 1. an order that a provisional liquidator of the Respondent be appointed pursuant to s 472(2) of the Corporations Act 2001; 2. an order that the provisional liquidator shall within 14 days, provide to the court and to the Applicant a report as to the provisional liquidation of the Respondent, including 2.1 the identification of the assets and liabilities of the Respondent; 2.2 an opinion as to the solvency of the Respondent; 2.3 the likely return to creditors; 2.4 any other information necessary to enable the financial position of the Respondent to be assessed; and 2.5 any suspected contravention of the Act by the directors and officers of the Respondent; 2 The companies in respect of which the orders are sought are Eskdale South Cattle Company Pty Ltd ("Eskdale") (in QUD 426/2013) and Carluke Capital Pty Ltd ("Carluke Capital") (in QUD 427/2013). Both matters first came before me urgently on 12 July 2013, the interlocutory processes having been filed in the Court the previous evening. At that time it was clear that the defendants had not been served until somewhat late on the evening of 11 July 2013, and that any legal representatives they instructed would have had inadequate time to become acquainted with the proceedings on the morning of the hearing. 3 At the hearing on 12 July 2013 an appearance was entered on behalf of the defendants in QUD 426/203. No appearance was entered in QUD 427/2013 by Carluke Capital. Such material as is before the Court indicates that Carluke Capital has not had directors for some time. 4 In the circumstances I was not prepared to make the orders sought by the Deputy Commissioner in para 1 and para 2 set out above. However in light of the material before the Court, in QUD 426/2013 I ordered, in summary that, subject to the usual undertakings as to damages: Ms Carrie Hofmeister pay into Court the sum of $1,136,723.37 from a Bank of Queensland account; Ms Hofmeister pay the sum of $100,000.00 into the Allens trust account in respect of legal fees and disbursements to defend the defendants in QUD 426/2013; and APA Innovations Pty Ltd ("APA") pay into Court the sum of $161,174.31 from another Bank of Queensland account. 5 In this manner, identified funds the subject of dispute between the parties (other than the funds paid to Allens) were "frozen" pending proper resolution of the interlocutory proceedings. I also adjourned the hearing of para 1 and para 2 of the interlocutory applications in both sets of proceedings to permit the defendants the opportunity to obtain further legal advice.

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Claimed tax liabilities 19 The Australian Taxation Office ("ATO") issued position papers to Carluke Capital in respect of proposed assessments or liability for tax as follows: Following an audit, on 14 November 2011 a position paper was issued in respect of proposed assessments under s 99A of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") for the 1994-2000 income years. On or about 13 March 2012 a position paper was issued in respect of liability under Division 13 PAYGW tax for the 2001-2009 income years, setting out a primary tax debt of $2,997,011.50 with penalties of $1,498,505.50. On or about 8 May 2012 a further position paper was issued in respect of a proposed assessment under s 99A of the ITAA 1936 for an amount of $2,104,759.50 and a penalty of $526,189.87. 20 On 11 March 2013 the ATO notified Carluke Capital that there would be an amendment to the Business Activity Statements of the Trust for the period 1 July 2000 to 30 June 2009 inclusive, with the result that there would be an increase in liability to $2,997,011. 21 On 22 March 2013 the ATO issued Carluke Capital with a notice of liability to pay a penalty for the period ended 30 September 2000 to 30 September 2008 inclusive for the amount of $1,498,505.50. 22 On or about 26 March 2013 the ATO issued a finalisation paper in respect of proposed amendments to the income tax return of the Trustees of the Carluke Capital for the 2006-2009 income years. 23 A Running Balance Account ("RBA") for the entity "Carluke Capital" dated 9 July 2013 stated that the total payable to the ATO, if paid on 30 July 2013, was $12,041,682.05. Mr Schulte for the Deputy Commissioner submitted that the Account Number on the RBA was the Australian Business Number ("ABN") of the Trust, and that there is no ambiguity over the entity to which the RBA related. 24 The fact that the Account Number on the RBA is the same as the ABN of the Trust does not appear to be in dispute. 25 Further, as Mr Bickford for the defendants in QUD 426/2013 submitted at the hearing, the defendants do not contend that there is no debt arising from Carluke Capital to the Deputy Commissioner in respect of sums identified in the RBA.

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Assets 29 As at 4 February 2013 it appears that the following real property was held by Carluke Capital as trustee of the Trust: Lots 12 and 14 on RP 20898 and Lots 1,2,11,19, 20 and 21 on RP 117783, County of Cavendish, Parish of Eskdale, Title References 1422112, 50275100, 50275101, 50275110, 50275118, 50275119, 50275120, located at 110-114 Old Man Camp Road, Eskdale Queensland. Lot 3 on RP 34479, County of Stanley, Parish of Toombul, Title Reference 15098247, located at 119 Towers Street, Ascot Queensland. Lot 107 on BUP 106827, County of Stanley, Parish of North Brisbane, Title Reference 50219488, located at Unit 107/12 Edward Street, Brisbane City Queensland. Lot 3 on SP 115567, County of Stanley, Parish of North Brisbane, title Reference 50258629 located at Unit 3/74 Oxlade Drive, New Farm Queensland. 30 Each of these properties was the subject of a mortgage to the National Australia Bank. 31 On 15 March 2013 transfers were lodged with the Queensland Land Registry transferring all of these properties from Carluke Capital to Eskdale, on the basis that the properties were held in trust and Eskdale was the new trustee. 32 The property at Old Man Camp Road, Eskdale was sold on or about 25 March 2013. A transfer in respect of that property was lodged on 8 April 2013 stating that the consideration for the sale was $3,883,191.00. 33 On 27 March 2013 a Deed of Loan was executed by Ms Carrie Hofmeister and Eskdale in which (materially): Eskdale acknowledged that it was indebted to Ms Carrie Hofmeister in the sum of $4,476,845. The parties acknowledged that Ms Hofmeister had requested the repayment of the loan but Eskdale had requested Ms Hofmeister to grant time in which to make the payment. The parties entered the agreement in consideration of the forbearance of Ms Hofmeister. As part of the agreement Eskdale had agreed to grant a mortgage over the properties at 119 Towers Street Ascot, Unit 107/12 Edward Street Brisbane, and Unit 3/74 Oxlade Drive New Farm to Ms Hofmeister. 34 On or about 13 June 2013 the property at Unit 107/12 Edward Street Brisbane was sold for $1.3 million. 35 On 5 July 2013 the Commonwealth lodged caveats over the properties at 119 Towers Street Ascot and Unit 3/74 Oxlade Drive New Farm, Queensland on the basis of the Commonwealth being subrogated to the lien of the trustee of Carluke Capital over those properties. 36 In her affidavit sworn 17 July 2013 Ms Carrie Hofmeister gave evidence as to assets in which Eskdale had an interest as at that date, encumbrances, estimated value of the assets, and Eskdale's interest in the relevant assets. This information was as follows: Description of asset and estimated value Description of encumbrance and estimated value Respondent's interest in the asset 119 Towers Street, Ascot (Lot 3 on RP 34479, County of Stanley, Parish of Toombul, Title Reference 15098247), value approximately $925,000 Registered Mortgage number 715023256 held by the Second Respondent, approximately $3,196,311.63 owing; and Sole registered proprietor as trustee for the Carluke Capital Trust Caveat lodged by the Commonwealth of Australia 3/74 Oxlade Drive, New Farm (Lot 3 on SP 115567, County of Stanley, Parish of North Brisbane, title Reference 50258629) value approximately $610,000 Registered Mortgage number 715023254 held by the Second Respondent, approximately $3,186,311.63 owing; and Sole registered proprietor as trustee for the Carluke Capital Trust Caveat lodged by the Commonwealth of Australia $42,000 owing by Grant Thornton for realisation proceeds from Loan Sole interest as trustee for the Carluke Capital Trust Unbanked cheque payable to Carluke Capital drawn by Somerset Council for $65.56 Sole interest as trustee for the Carluke Capital Trust Unbanked cheque payable to Carluke Capital drawn by Workcover Queensland for $3,705.19 Sole interest as trustee for the Carluke Capital Trust Bank of Queensland account number 21970381, nominal amount Sole interest as trustee for the Carluke Capital Trust

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Submissions of the parties 40 In summary the Deputy Commissioner submits that a provisional liquidator should be appointed to both companies because: Although Eskdale is the trustee of the Trust, Carluke Capital has a claim for indemnity against assets of the Trust in priority to the interests of beneficiaries which survives its removal as trustee. Since becoming trustee, Eskdale has sold or mortgaged the assets of the Trust in disregard of Carluke Capital's right of indemnity. Further Eskdale has transferred significant sums of cash obtained from the realisation of trust property to Ms Carrie Hofmeister and APA. By reason of Carluke Capital and the Trust being insolvent, the Commonwealth as creditor of Carluke Capital claims to be entitled to be subrogated to the Trustee's lien over properties owned by the Trust, namely those properties in respect of which the Commonwealth has lodged caveats. Carluke Capital has no directors and has been stripped of assets and left with liabilities. Its only asset remaining is its right of indemnity against the assets of the Trust, and this is in jeopardy because of the company's lack of management. There are a number of unexplained transactions involving dissipation of trust funds. Eskdale has been dissipating trust assets in complete disregard of Carluke Capital's right of indemnity and has ignored the Trustee's lien of Carluke Capital by granting mortgages to Ms Carrie Hofmeister and transferring trust assets to her and APA. The Deputy Commissioner of Taxation is a creditor of both Carluke Capital and Eskdale for the purposes of s 462(2) and s 472 of the Corporations Act because: o for the purposes of a winding up application "creditor" includes a creditor both at law and in equity: In re Steel Wing Co Ltd [1921] 1 Ch 349; o in relation specifically to Eskdale by reason of the service of the s 260-5 notice served on the debtor of the Trust: Bruton Holdings Pty Ltd (In Liquidation) v Commissioner of Taxation of the Commonwealth of Australia (2009) 239 CLR 346; o the debt arises from the RBA and the general interest charge which arises when the RBA deficit debt is not paid. The accountant who previously acted for the Trust when Carluke Capital was trustee, Mr Peter Maletz, continues to act for the Trust now that Eskdale is the trustee. 41 The defendants in QUD 426/2013 filed a detailed outline of argument, in addition to which Mr Harrison QC made supplementary oral submissions at the hearing. In summary, the defendants submit: The claim of the Deputy Commissioner against Carluke Capital and Eskdale constitutes a claim of double recovery by enforcement of an alternative assessment, because the Deputy Commissioner has retained tax payments it received following earlier assessments: Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 214. The defendants relied in particular on the affidavit of Mr Peter Maletz sworn 18 July 2013 as evidence. It followed that the Deputy Commissioner had not come to Court "with clean hands", had no standing, and should not be entitled to equitable relief. The Deputy Commissioner had not established that Carluke Capital had a tax liability. Rather, the Deputy Commissioner only had "potential claims" because of "proposed adjustments" to tax liabilities. The RBA dated 9 July 2013 is addressed to "Carluke Capital, 119 Towers Street, Ascot QLD 4007". The identity of the addressee is ambiguous, and to that extent the RBA is, on its face, defective. There is no allegation that the Deputy Commissioner is a creditor of Eskdale - it is for this reason that the winding up application in respect of Eskdale is based on s 461(1)(k) of the Corporations Act. While it may be appropriate to appoint a provisional liquidator to Carluke Capital, there was no reason to appoint a provisional liquidator to Eskdale because, inter alia, orders were already in place to freeze the assets of Eskdale pending the hearing of the winding up application, and those orders were both adequate and cost-effective.

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Eskdale 43 First, while the Deputy Commissioner has no judgment against Carluke Capital as the trustee of the Trust, the defendants conceded at the hearing that they do not dispute that a substantial debt exists in favour of the Deputy Commissioner based on the RBA. 44 Second, in relation to the issue of a right of indemnity in Carluke Capital against Eskdale for unpaid tax liabilities of Carluke Capital, the defendants submit that the Deputy Commissioner's claim is "novel". I do not consider this claim to be novel. On the facts of this case it appears that not only is Carluke Capital insolvent and directionless, but the only assets it appeared to have until it was removed as trustee were assets of the Trust. Similarly, the evidence of Ms Hofmeister is that the only assets of Eskdale are the assets of the Trust. 45 The Trust is indebted to the Deputy Commissioner in the amount identified as unpaid tax liabilities set out in the "Carluke Capital" RBA. I do not accept the submission of the defendants that the reference to "Carluke Capital" in the RBA is ambiguous - as was clear from the undisputed fact that the Account Number on the RBA is the ABN of the Trust, the RBA clearly refers to the Trust and its tax liability. I accept that the Deputy Commissioner is a creditor of the Trust, and, to that extent, Eskdale in its capacity as trustee of the Trust. 46 Principles relevant to the right of indemnity of a trustee, the effect of transfer to a new trustee and a creditor's right of subrogation were recently considered by the Court of Appeal in Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26. In that case Barrett JA for the Court observed (in summary): A trustee's right thus to be indemnified out of trust assets for all debts duly and properly incurred as trustee is a right exercisable prospectively by way of exoneration or retrospectively by way of reimbursement (see Re Blundell (1888) 40 Ch D 370 at 376-7). The right arises simply as an incident of the office of trustee (Worrall v Harford [1802] EngR 342; (1802) 8 Ves Jun 4; (1802) 32 ER 250) (at [38]). The right of a trustee to be indemnified out of trust property is often described as a charge or lien: see, for example, Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 (at [41]). Before a trustee actually pays debts that have given it a preferred beneficial interest in the trust assets, the interest enures for the benefit of the unpaid creditors. Creditors themselves may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee (at [70]). 47 In Queensland, a trustee's right of reimbursement also arises by operation of s 72 of the Trusts Act 1973 (Qld) which provides: Reimbursement of trustee out of trust property A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers. 48 On the facts of this case it is clear that Eskdale merely operates as a shell for the purposes of the Trust. It has no interest in any assets other than Trust assets. I consider that not only does Carluke Capital have a right of indemnity against the assets of the Trust which were transferred to Eskdale, but the Deputy Commissioner has a right of subrogation against those assets as a creditor of Carluke Capital and the Trust. I reject the submission that the Deputy Commissioner has no standing to seek orders against Eskdale in respect of the appointment of a provisional liquidator to or for the winding up of that company. 49 Third, while in relation to the substantive claim against Eskdale the defendants dispute that there is a "justifiable lack of confidence" in the conduct and management of Eskdale's affairs, I find that a lack of confidence is justified. On the facts, it is clear that: Ms Hofmeister is the sole director of Eskdale. Eskdale became trustee of the Trust following the issue of a position paper by the ATO on 14 November 2011 where substantial tax liabilities were identified in respect of the Trust, and immediately prior to the bankruptcy of Mr Maxwell Hofmeister on 26 February 2013. Properties of the Trust have been liquidated, and the proceeds placed in, inter alia, a bank account operated by Ms Hofmeister. In a number of unexplained transactions, substantial sums have been removed from the bank account operated by Ms Hofmeister, to destinations unknown. 50 In my view it is reasonable to conclude that the affairs of the Trust are being conducted in a manner which presumably benefits interests associated with Ms Hofmeister, and disregards the interests of creditors of the Trust. 51 Fourth, I reject the submissions of the defendants that the conduct of the Deputy Commissioner constitutes an abuse of process, and that he lacks "clean hands" in the equitable sense, because allegedly the claim of the Deputy Commissioner can properly be described as a claim for double recovery of tax. The defendants relied upon the affidavit of Mr Maletz, in particular paras 10, 18(d), 21, 23, 24, 25, 26 and 27. These paragraphs detail, inter alia, tax refunds to the Trust and to Mr Maxwell Hofmeister from the ATO. In my view however: To the extent that this evidence is reliable, it simply details historical events relating to the endeavours of the parties to regularise the tax positions of, inter alia, the Trust and Mr Maxwell Hofmeister. I note that proposed assessments have been issued, presumably pursuant to ATO Practice Statement Law Administration PS LA 2006/7. There is absolutely no evidence to support a claim of abuse of process or collateral purpose by the Deputy Commissioner. As I noted earlier in this judgment, there is no dispute by the defendants that a debt exists from the Trust to the Commonwealth based on the RBA. Complaints raised by the defendants concerning the details of tax liabilities owed in respect of the Trust appear in the nature of objections which could have been raised by Carluke Capital, but were not (and currently cannot be in light of the absence of management of Carluke Capital). Indeed the case relied upon by the defendants - Federal Commissioner of Taxation v Grimaldi (No 9) (2009) 181 FCR 275 - concerned a challenge to the operation of s 177 of the ITAA 1936 as between two taxpayers rather than any facts analogous to the situation currently before the Court. 52 Fifth, I am not persuaded of the alleged importance of Eskdale remaining free from the appointment of a provisional liquidator to enable the company to deal with any claim by Carluke Capital, or by any liquidator of Carluke Capital or anyone else (including the Deputy Commissioner) to a right of indemnity from the assets of the Trust. I also reject the submission of the defendants that the Deputy Commissioner cannot maintain a contention of a right of indemnity by Carluke Capital against Eskdale because the success of the Deputy Commissioner must involve findings of bad faith on the part of Carluke Capital. This submission of the defendants is, in my view, implausible, self-serving and illogical. Carluke Capital and Eskdale are companies owned and controlled by the same family. Any claim of "bad faith" would potentially equally apply to members of the Hofmeister family and Eskdale itself. to permit Carluke Capital and Eskdale to rely on alleged bad faith of Carluke Capital in these circumstances would be, in my view, in itself inequitable. 53 Sixth, circumstances where it is appropriate for the Court to appoint a provisional liquidator are well-settled. As Gordon J recently observed in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189; [2013] FCA 234: 16. In [Australian Securities Commission v Solomon (1996) 19 ACSR 73] at 80 Tamberlin J listed six principles concerning the appointment of a provisional liquidator, which are often cited in this context: (a) The court should only appoint a provisional liquidator where it is satisfied that there is a valid and duly authorised winding up application and that there is a reasonable prospect that a winding up order will be made: see Debelle J in Re J N Taylor Holdings Ltd; Zempilas v J N Taylor Holdings Ltd [1991] NTSC 15; (1991) 3 ACSR 516; 9 ACLC 1 at 12-3. (b) The fact that the assets of the corporation may be at risk is a relevant consideration. (c) The provisional liquidator's primary duty is to preserve the status quo to ensure the least possible harm to all concerned and to enable the court to decide, after a further examination, whether the company should be wound up: Re Carapark Industries Pty Ltd (in liq) (1966) 9 FLR 297; 86 WN (Pt 1)(NSW) 165 at 171. (d) The court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience: Re Club Mediterranean Pty Ltd (1975) 11 SASR 481 at 484 per Bright J. The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and various and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact. (e) It may be appropriate to appoint a provisional liquidator in the public interest where there is a need for an independent examination of the state of accounts of the corporation by someone other than the directors: Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493. (f) Where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company's affairs would be properly conducted with due regard for the interests of shareholders, it may be appropriate to appoint a provisional liquidator: see Montgomery Windsor (NSW) Pty Ltd v Ilopa Pty Ltd (1984) 2 ACLC 224. 54 Events to which I have referred in this judgment, including the timing and facts of the removal of Carluke Capital and the appointment of Eskdale as trustee of the Trust, and the execution of a loan and mortgage document in respect of trust properties in favour of Ms Carrie Hofmeister, must be viewed as highly suspicious. This is particularly so in circumstances where significant tax debts have been alleged against the Trust and the realisation of Trust assets has promptly lead to dissipation of Trust funds in an unexplained manner. As I have already observed, the only apparent asset of Carluke Capital which could in any fashion be put toward satisfaction of its own debts as trustee is its right of indemnity against Eskdale. I do not accept the submission of the defendants that this right of indemnity could not be enforced against Eskdale or even that there is any doubt concerning its enforceability. In the current situation where it appears that not only Carluke Capital, but more recently Eskdale has been stripped of assets by Hofmeister family, and a reasonable inference can be drawn that the stripping of assets was for the benefit of the Hofmeister family, the proper order is that a provisional liquidator be appointed to safeguard the remaining assets of the Trust. 55 I note the submission of the defendants concerning the costs associated with the appointment of a provisional liquidator, compared with the current orders in place to freeze Trust assets including the payment of money into Court. In my view, however, such orders, while effective in the short term, are inadequate to permit further investigation into Trust affairs including the whereabouts of assets already dissipated. Further, for reasons I have already explained I consider it likely that any return of control of Trust assets to Eskdale would result in further - and possibly complete - dissipation, to the prejudice of creditors. 56 Finally the Deputy Commissioner has submitted that Eskdale itself is hopelessly insolvent. To the extent that it is trustee of a Trust where liabilities appear to significantly outweigh assets, this seems true. In any event, however, there appear to be grounds before the Court to support an order that Eskdale be wound up on the just and equitable ground in s 461(1)(k) of the Corporations Act. In particular, I note the decision in Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 where Finn J found that the relevant trustee company was not insolvent but nonetheless was prepared to order that it be wound up where trust businesses had been mismanaged.

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