Deputy Commissioner of Taxation v Peter Sleiman Investments Pty Ltd as trustee for the Sleiman Family Trust

Application for stay of proceedings - Background

1. On 24 November 2016 I delivered judgment ([2016] NSWSC 1657) ("Judgment") in which I held that the Defendant, Peter Sleiman Investments Pty Ltd ("PSI") should be wound up in insolvency under s 459A of the Corporations Act 2001 (Cth) and that the Amended Summons and Amended Cross-Summons filed by the Plaintiff, the Deputy Commissioner of Taxation ("DCT"), and PSI respectively should otherwise be dismissed with no order as to costs. At PSI's request, I also made orders deferring the entry of that judgment to 5:00pm today to allow PSI to bring a stay application pending any appeal from my judgment.
2. By Notice of Motion filed on 29 November 2016, now superseded by an Amended Notice of Motion filed today by leave, PSI, claiming to act in its capacity as trustee for the Sleiman Family Trust ("SFT"), and several persons who were not party to the proceedings, sought to stay the orders made on 24 November 2016, upon their entry, pending determination of an appeal against my judgment or an order that any liquidator be appointed provisionally, or a stay for a further period to permit a stay application to be brought in the Court of Appeal. The persons who were not party to the proceedings also sought orders that they be joined if the Court was minded to make winding up orders. The fact that the Court was minded to make such orders was, of course, apparent by the fact that it had already done so, albeit that it had ordered that those orders not be entered.
3. I should make several other observations, by way of introduction, as to the form of the application. First, I will proceed on the basis that the application is brought by PSI, at least in its own right and not only in its capacity of a particular trust, since a winding up order is directed to a company, and not to that company in any particular capacity or capacities that it may occupy. Second, for reasons I have indicated in an earlier judgment, I have not ordered that additional persons be joined as parties to these proceedings, where it had not previously been suggested that they were either necessary or proper parties, and all that now remains in this application is to determine whether the winding up order I have made should be stayed, a matter to which the DCT and PSI are the proper parties. As I observed in the Judgment, the question whether other persons might have needed to be joined, had the Court made orders under s 37A of the Conveyancing Act 1919 (NSW) had not arisen because the Court had not made such orders. I have therefore left the question whether such persons are properly joined in any appeal which PSI or they may seek to bring to be determined by the Court of Appeal. I also noted, in the course of submissions today and my earlier judgment in respect of the joiner of those persons, that that position supports PSI's case for at least a short stay of the earlier orders, to allow it to approach the Court of Appeal to determine whether the Court will permit the joinder of additional appellants, at least against the contingency that a liquidator appointed to PSI would not pursue an appeal.

Issues on appeal that are not the subject of the stay application

1. PSI, helpfully, provided a draft notice of appeal indicating the matters which were to be the subject of its appeal. Those matters included my declining to make the declarations sought in its Amended Cross-Summons, declining to appoint new trustees under s 70 of the Trustee Act 1925 (NSW) and declining to discharge freezing orders previously made by another judge of the Court, as well as an appeal against my exercise of a discretion not to defer the making of a winding up order. PSI made submissions as to the merits of its appeal generally in this application, although Mr Kelly (who appears with Mr Hartford Davis for PSI) properly recognised that no question of a stay of orders that I have not made can arise.
2. PSI rightly identified that the overriding principle, in respect of a stay application, is to ask what the interests of justice require: New South Wales Bar Association v Stevens [2003] NSWCA 95 at [83]. It also approached the relevant questions in the order that I had adopted in Yoo v Toppro Pty Ltd [2016] NSWSC 734. PSI identified the first consideration as to whether there were reasonable grounds for its appeal, and submitted that that involved a relatively low threshold: Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2008] FCA 1867 at [40]. It seems to me that the question must be formulated somewhat more precisely than that. The question here is not whether PSI has reasonable grounds for its appeal generally, but whether it has reasonable grounds for its appeal against my decision not to defer the making of a winding up order, which is the matter which is the subject of the stay application. That is the case notwithstanding that I accept, as Mr Kelly emphasised, that regard must be had to the other aspects of the appeal, particularly so far as questions of the impact of the granting or declining of a stay upon the parties to the proceedings needs to be determined. For that reason, I will also address Mr Kelly's submissions as to the merits of other aspects of the appeal that are not the subject of the stay application. Before doing so, I repeat the observation which I have previously made in Yoo v Toppro Pty Ltd above, although no doubt I am not the first trial judge to have made it, that a trial judge is not necessarily the best person to assess the merits of his or her own decision in a matter.
3. The first matter which is the subject of appeal is my failure to make the orders sought in the Amended Cross-Summons, in respect of a number of trusts, to the effect that PSI held particular properties under new unit trusts and "free of any estate or interest in" those properties in favour of PSI as trustee of SFT. I dealt with that matter at Judgment [64]-[69]. I there declined to make that declaration on several grounds, and PSI contends that each of those grounds is in error.
4. The first of those grounds was directed to my declining to make that declaration on the basis that it was inconsistent with any right of indemnity of PSI as trustee of SFT against the relevant properties. I noted (Judgment [66]) that PSI, as trustee or former trustee, had a right of indemnity over the trust assets, which would ordinarily survive its removal as trustee, but which the form of declaration sought did not recognise. I also noted that Mr Cotman who appeared for the DCT submitted that PSI also proposed that new trustees be appointed to the various unit trusts and the proposed new trustees made no offer to seek to preserve that right of indemnity.
5. Mr Kelly advances a detailed submission, which was not put in this way at the primary hearing before me, as to the reasons why such an indemnity could not attach to the relevant properties, as distinct from the units issued to PSI when the land tax unit trusts were created, or the proceeds (since dissipated) of the redemption of those units. Mr Kelly submits that, if the declarations of trust that created the new unit trusts were valid, then the relevant properties did not form any part of the assets of the SFT and could not have been the subject of a charge or lien supporting an indemnity in favour of PSI as the former trustee of the SFT. I did not address that submission in that form in my judgment, because it had not been put in that form.
6. There seems to me to be a difficulty with this submission, which was identified by Mr Cotman in the course of submissions today. The premise of this aspect of the submission is the validity of the declarations of trust by which PSI declared that it held the properties on trust for the new land tax units trusts. I held in the Judgment that a liquidator is to be appointed to PSI. Assuming that the transactions by which PSI (as trustee for the SFT) surrendered its beneficial interest in the properties in favour of the land tax unit trusts, and other associated transactions, would be effective unless and until the Court made an order on the liquidator's application to set them aside, it does not follow that the Court should make a declaration, at the point of a liquidator's appointment, that is inconsistent with the position that would arise if the transaction(s) were set aside on that liquidator's application. Specifically, it seems to me that the Court should not make, at the point of judgment, a declaration on the premise that PSI as trustee of the SFT had no right of indemnity against the properties because it did not own them in that capacity, when that liquidator could properly bring an application to set aside the transaction(s) that brought about that result. There seems to me a real inconsistency between, on the one hand, appointing a liquidator who may obtain orders setting aside a transaction in an appropriate case, and, on the other hand, making a declaration on a basis that ignores or pre-empts the potential that such orders will be made.
7. It seems to me that PSI's second submission, that any right of indemnity in favour of PSI as trustee of the SFT could not be exercised against the assets of other unit trusts, has the same difficulty as its first submission. That submission also assumes the effect of the transactions by which PSI declared it held the properties for the land tax unit trusts, where those transactions may well be subject to challenge by the liquidator who was to be appointed by the Court which would potentially undermine that assumption. It seems to me that the declaration sought would again potentially pre-empt the steps that may be properly taken in the proper exercise of statutory powers by that liquidator. That seems to me, again, to be a reason that the Court should not make that declaration. These two submissions do not seem to me to have any real prospect of success on appeal.
8. PSI puts a further submission, which I also do not understand to have been put at the hearing, that a right of indemnity may not exist because the liabilities of SFT may not have been properly incurred by it. The DCT responds, consistent with my understanding, that that point was not put at the hearing. The DCT also submits it is without substance, in that the tax debts in issue arose from the conduct of the trust business of SFT. PSI's submission in this respect does not seem to me to provide any real support for PSI's prospects of appeal, both because it was not part of the case that I had to determine, and because PSI's tax liability arose from the conduct of its business anterior to any wrongful failure by its directors to fail to pay the tax that was the subject of that liability.
9. PSI also submits that my view that the declarations sought by PSI should not be made, where the liquidator to be appointed to PSI had not had the opportunity to be heard about them, was in error. PSI submits, and I accept, that the Court should not, or at least ordinarily should not, decline to determine a substantial question which had been fully argued, where considerations of convenience require the Court to decide that question between the parties, and if appropriate make a declaration of right: Forster v Jododex Aust Pty Ltd [1972] HCA 61; (1972) 127 CLR 421 at 439. Mr Kelly submits that to decline to make a declaration on the basis that the matter might be agitated in a different proceeding at a later point in time by a different party, was contrary to the Court's duty under s 63 of the Supreme Court Act 1970 (NSW) to grant such remedies as the Cross-Claimant was entitled. However, with the greatest of respect to Mr Kelly, it seems to me that this submission operates at a degree of generality and is somewhat distant from the particular circumstances that I was addressing. I also do not accept that "considerations of convenience" supported the result for which Mr Kelly contends.
10. As I have noted above, the Court determined, in the Judgment, that PSI should be wound up and that a liquidator should be appointed, and that liquidator may then seek orders avoiding, for example, uncommercial transactions. It seems to me that it is a proper exercise of judicial discretion to recognise that, where a liquidator is to be appointed and has such powers, it would be inappropriate to make a declaration on a basis that ignores or pre-empts those powers and the potential consequence of their exercise, particularly where the liquidator would have no opportunity to be heard as to that question. It seems to me that a declaration made on the basis that PSI as trustee for the SFT was not the beneficial owner of the properties would have particular difficulties, where the liquidator might well attack the transaction(s) by which that situation arose. Such a declaration, at least, would have little utility given the fragility of the assumption on which it was based, and at worst, it would tend to pre-empt the exercise of the liquidators' statutory powers, so far as it apparently confirmed the validity of the transactions which the liquidator was entitled to attack.
11. That proposition is not limited in its application to this particular case. It would be unfortunate if the Court's power to grant declaratory relief were used to declare the validity of transactions between an insolvent company and persons interested in it immediately before a liquidator was appointed who might then attack such transactions. It seems to me that declarations made in those circumstances would have something of the quality of a pre-emptive strike against the liquidator, so far as he or she had the capacity to challenge the validity of such transactions, and that the Court should be reluctant to grant declaratory relief, in the liquidator's absence, in those circumstances. It is not sufficient answer to that proposition that, as PSI points out, the DCT opposed the declarations where it did not have access to the statutory provisions available to a liquidator to challenge the relevant transactions.
12. Third, PSI submitted that my refusal to grant the declarations sought was in error since I should not have found that an intent to defeat the creditors of PSI existed in respect of the transactions. PSI particularly attacks my finding that the logic of the transactions did not require a borrowing from National Australia Bank Limited (NAB) which was larger than the amount required to discharge the mortgages to NAB, which was then paid out, at least in large part, to Mr Peter Sleiman in a manner that put it beyond the reach of PSI's creditors other than Mr Peter Sleiman. PSI relies, in the attack on my findings in that respect, on advice given by Mr Batten in correspondence, to which I had referred in the Judgment.
13. The DCT responds that the giving of the relevant value, which PSI contends was necessary to the efficacy of the transactions to bring about a saving of land tax, occurred by the issue of units to PSI in its capacity as trustee of the SFT and the subsequent redemption of the units was a separate matter. The DCT also relies on Mr Batten's correspondence for the proposition that a redemption of the units in the land tax unit trusts could be done on a basis that left the land tax unit trusts liable to SFT. Indeed, at one point, it appears that explanations of the transaction had been given to the DCT which led the DCT to form the view that that was the way in which the transaction had in fact been done, at least prior to the point at which units issued to SFT in the land tax unit trusts were redeemed with funds borrowed from NAB.
14. It seems to me that these matters also have little prospect of founding a successful appeal against the findings that I reached as to the logic of the transaction. First, all that was said by Mr Batten in correspondence, as I understand the case that is now put by PSI in this respect, was that full value had to be paid for the properties, not that it had to be paid in cash or cash equivalent, and not that PSI had to borrow funds from a third party lender so as to permit PSI as trustee of the unit trusts to redeem the units that were issued to PSI as trustee of the SFT in respect of the value given to acquire the properties. Second, Mr Batten's comments were made in correspondence and Mr Batten was not called to give evidence to support the position which he had advanced in that correspondence. Third, the case law on which Mr Kelly now relies to bolster Mr Batten's analysis was not the subject of any submission of any substance at the hearing before me, and the description of the transaction to which Mr Kelly refers in oral submissions today was not a submission of that kind. Fourth, these matters do not address, as a matter of mechanism, why PSI needed to borrow a substantial sum from a third party lender to pay that sum to itself, albeit in a different capacity, rather than for example proceeding by an accounting entry in order to establish proof of full value for the redemption of the units, if that matter were in fact relevant to establishing proof of full value for the transfer of the properties, at the prior point at which units were issued by PSI as trustee for the unit trusts to PSI as trustee for the SFT.
15. It seems to me that there is therefore little prospect that PSI can establish, on appeal, that I was in error in drawing the inference that the transaction had a substantial purpose other than a saving of land tax, having regard to the way in which it put its case at the hearing, and even with regard to the additional matters which it has now raised which were not then put.

Whether the winding up order should be stayed

1. It is also important to note that the matters that PSI raised, and that I addressed above, are plainly relevant to the context in which the Court would make a winding up order, but are not themselves directed to the question of whether the Court ought to have exercised its discretion to defer a winding up order, in circumstances that it had found that PSI was insolvent as a matter of fact. PSI does not address, in its written or oral submissions, the case law to which I had referred in paragraphs [88]ff of the Judgment, as to the circumstances in which the Court should defer a winding up order to allow the prosecution of an appeal against a tax assessment. In oral submissions, Mr Kelly largely repeats the submission that he had been put at the hearing, that the Court should have inferred that PSI had positive prospects in its appeal in the Administrative Appeals Tribunal ("AAT") against a tax assessment against it, which I had addressed at [92] of the Judgment by pointing to the lack of evidence of substance as to those prospects. It does not seem to me that PSI's submissions at the hearing, or today, address those matters that would ordinarily need to be established to support the deferral of a winding up order, particularly in a revenue context, by way of evidence of the prospects of the appeal or lack of prejudice to the collection of revenue, to which I had referred in the Judgment.
2. Not surprisingly, the DCT's submissions address this matter at some length. The DCT submits, first, that PSI is insolvent in fact and that no submission was made to the contrary. The DCT makes several submissions as to the nature of transactions and events involving PSI, which I do not consider it necessary to address and on which I do not rely in determining the stay application. The DCT submits that the exercise of a discretion whether to defer a winding up order is, in its nature, discretionary, and that any error in that respect would have to be determined by reference to the principles in House v The King (1936) 55 CLR 499. The DCT also submits that no submissions are put to demonstrate the substance of the suggested error in ground 6 of PSI's Notice of Appeal, where the DCT submits that matters relating to the substance of the appeal were not in evidence before the Court. The DCT also refers to my observation at Judgment [92], to which I referred above, as to the absence of evidence of substance in respect of the prospects of the appeal and submits that that matter is fatal to the application to stay the winding up.
3. It seems to me that PSI's submissions provide little basis for a successful appeal against an exercise of a judicial discretion not to defer the winding up of a company that I had found to be insolvent in fact, and do not indicate any error in the exercise of the applicable principles in that respect, or that I could not properly apply, as I did, the approach noted by Barrett J (as his Honour then was) in TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410, to which I referred in the Judgment at [95]. For all these reasons, while I recognise once again that a trial judge is not necessarily the best placed to assess the legal prospects of an appeal against his or her judgment, it seems to me that PSI has little prospect of a successful appeal against my decision not to defer making a winding up order.

Other matters relevant to the grant of a stay

1. Mr Kelly identifies the second issue, in a stay application, as to whether the refusal of a stay would impose irreparable harm if an appeal was successful. Mr Kelly submits that PSI would not be able to prosecute its appeal against the tax assessment against it if a liquidator is appointed. The DCT responds that a liquidator would assess, and may continue, such an appeal. I accept that that is at least a theoretical possibility, although it also seems to me that there is real substance in the submission that a liquidator would be less likely to prosecute such an appeal than the directors of PSI, having quite different interests so far as that matter is concerned.
2. Mr Kelly in turn refers to an offer by unitholders to pay PSI's GST debt within 21 days of a stay, which is offered as an undertaking to the Court. It seems to me that there are several difficulties with that offer. The first is that its terms have the consequence that, in effect, a presently insolvent company, owing a presently unpaid GST debt, would continue in that position for a further 21 days, until that undertaking was due to be performed, quite apart from the unpaid debts owed by PSI in respect of the other assessments issued by the DCT. The second difficulty is that there may be a question for the DCT, as to whether it would be prepared to accept such a payment from a third party, in circumstances of PSI's insolvency, which may raise questions as to the reach of the preference provisions. That seems to me not a matter which the Court should foreclose, by accepting an undertaking which contemplates such a payment. The third difficulty, which it seems to me to be real, is that such a transaction could occur by a tender of payment by the beneficiaries, which the DCT may or may not accept, or by an arrangement between the parties, but is not one that the Court would ordinarily have imposed by order in the context of a winding up application. In those circumstances, it seems to me that the Court ought to be reluctant to accept an undertaking by third parties to do what it could not require those third parties to have done in such an application.
3. PSI also submits that the Court should not countenance DCT's "litigation strategy" to wind up PSI in the context of its appeal to the AAT. The DCT, not surprisingly, takes offence at the proposition that is now put that it has such a strategy, and submits that there is a lack of proper basis for that submission in the evidence, as well as drawing attention to several other matters that could broadly be described as adverse to PSI. It seems to me that the proposition that the DCT has such a strategy has no basis in the evidence before me; it was not put to any officer of the DCT, where evidence was given by officers of the DCT who were not cross-examined; and the Court could not reach a finding, and should not reach such a finding, where that matter has never been put in a way that would establish a basis for it.
4. It therefore does not seem to me that sufficient prospects of success in an appeal against the exercise of my discretion not to defer the making of a winding up order have been established, even in the context of the other issues raised on an appeal, to establish that the stay sought by PSI is in the interests of justice. PSI also refers to the effect of the stay on the status quo. It does not seem to me to be necessary to address that matter further, where at least in my view, the basis for a stay is otherwise not established.
5. Mr Kelly submits that, if the Court is not minded to grant a stay or join the unitholders, then a stay should be granted for 14 days to allow PSI the opportunity to seek leave to appeal and seek a stay from the Court of Appeal, including making any application for joinder of unitholders in the appeal. As I have noted above, it seems to me that the case for such a stay, on that basis, is strengthened where I have not joined unitholders in the proceedings before me, and consider that that is properly a question for the Court of Appeal.
6. Although I propose to dismiss the application for a stay on the basis on which it was brought before me, because I am not satisfied that the interests of justice support such a stay, I recognise (as I noted in Yoo v Toppro Pty Ltd above at [23]) that these are matters as to which minds may differ, and a judge who hears a matter is not always in a better position than an appellate court to determine the question of prospects of appeal from his or her own judgment. I am also conscious that, as PSI rightly points out, once a liquidator is appointed, it is likely to be difficult at best, and more likely impossible, for PSI to satisfy the requirements for an order for his or her removal. I therefore propose to order a stay of the winding up orders, which will be entered today, for 14 days to allow PSI to bring a stay application in the Court of Appeal, together with its substantive appeal against my judgment and any application to join beneficiaries of the unit trusts in that appeal.

Orders

1. I therefore make the following orders: On the undertaking of Peter Sleiman Investments Pty Ltd, by its Counsel, that it will not incur any liabilities from the time of providing this continuing undertaking to 5pm on 15 December 2016, without further leave of the Court:
2. Stay orders 1-4 as set out in the Judgment delivered on 24 November 2016, and to be entered today, to 4pm 15 December 2016, to permit an appeal by Peter Sleiman Investments Pty Ltd from Black J's orders to be brought to the Court of Appeal.
3. The Amended Notice of Motion filed by Peter Sleiman Investments Pty Ltd by leave today otherwise be dismissed.
4. Costs be reserved.

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