Deputy Commissioner of Taxation v TMPL Pty Ltd

JUDGE: PERRAM J DATE: 19 NOVEMBER 2010 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 These proceedings represent the attempt by the plaintiff (the DCT) to set aside a deed of company arrangement entered into by the first defendant (TMPL). The second defendants are the deed administrators. The defendants seek a temporary stay of these proceedings until after the determination of certain review applications initiated by TMPL before the Administrative Appeals Tribunal which, if fully successful, would result in the setting aside of certain notices of assessment issued to TMPL by the Commissioner of Taxation. 2 By reason of the notices of assessment the DCT is a creditor of TMPL in an amount which, at least at 6 July 2009, stood at $19,538,926.84. There is no suggestion that TMPL has paid any part of those assessments. It is apparent, in any event, that it does not have sufficient liquid assets to meet them. On any view, it is insolvent on a cash flow basis. TMPL has four other unsecured creditors but they amount only to $16,800. 3 The present deed of company arrangement has the following familiar features: 1. the establishment of a deed fund out of the realisable assets of TMPL; 2. the conversion of the unsecured creditors into a class known as the "deed creditors"; 3. the payment out of the deed fund of the deed administrators' costs, a small amount owing to a preferred creditor and, thereafter, the division between the "deed creditors" of the remainder of the deed fund; 4. the release by deed creditors upon payment to them out of the deed fund of their original claims on TMPL. 4 The deed also reveals two related strategies to increase the return to at least some of the creditors: (a) the funding by TMPL's sole director, and 99 per cent shareholder, Mr Michael Triguboff, of proceedings before the Administrative Appeals Tribunal to challenge the notices of assessment. If those notices were to be set aside or reduced the extent of the DCT's claims on the deed fund would be eliminated or reduced; (b) the pursuit of proceedings by TMPL against Universal Studios relating to claims arising from a film made in 2000 called Pitch Black (one of the Chronicles of Riddick series). 5 Upon the creditors resolving to adopt a deed of company arrangement its provisions become binding on creditors "so far as concerns claims arising on or before" a date specified in the deed, here 1 July 2009: s 444D(1) Corporations Act 2001 (Cth). In this case, there is no debate but that all of the unsecured creditors' claims arose before that date. Accordingly, the effect of the deed, if it operates primarily as intended, is that the DCT will, at best, exchange his claim for $19,538,926.84 on TMPL with a pro rata claim on the deed fund. At worst, the proceedings in the Tribunal will result in the notices of assessment being set aside and with them any entitlement on the DCT's part to make any claim on the deed fund or TMPL. 6 There are some circumstances surrounding the deed which have inflamed the curiosity of the DCT. Broadly these may be summarised as falling into three categories: the events leading to the creditors' resolution to adopt the deed; payments made by TMPL around the time of its receiving the notices of assessment; and the degree of investigation undertaken by the deed administrators. 7 As to the circumstances surrounding the deed's adoption, it suffices to observe only this: the DCT voted against its adoption and the other creditors, by value, were insignificant. Viewed that way, therefore, the creditors were overwhelmingly against the deed. However, on a poll, the other unsecured creditors voted in favour of its adoption and the DCT was solitary in voting against it. The effect of reg 5.6.21(4) of the Corporations Regulations 2001 was, in that circumstance, to give the person presiding at the meeting a casting vote. In this case that was Mr Antony de Vries (one of the second defendants) and he cast his vote in favour of adopting the deed which was contrary to the wishes of the DCT. 8 As to the payments made by TMPL at or around the time of the assessments, it is important to understand that there were, in fact, two sets of notices of assessment. One set related to the question of how TMPL's venture into the film Pitch Black was to be treated for tax purposes; the other set concerned the quite unrelated issue of how certain payments resulting from the termination of Mr Triguboff and TMPL's complex relationship with the finance firm Lazard Frères should be treated for tax purposes. I will call the first set the Pitch Black notices and the second, the Lazard Frères notices. The Pitch Black notices were issued to TMPL on 23 June 2008, totalled some $4,007,949.97 and related to the income years 2000, 2001 and 2002. Thereafter TMPL made the following payments on the following dates (all of which postdate 23 June 2008, the date of the assessments): Date Amount Nature 30 June 2008 $1.9 million Franked dividend 15 August 2008 $2.2 million Unsecured loan to MIR Asia Pty Ltd repayable on 15 August 2016 3 October 2008 $828,800 Unsecured loan to MIR Asia Pty Ltd repayable on 3 October 2016

9 Put another way, in the face of a $4 million tax bill, TMPL paid nearly $5 million to its shareholders and the entity MIR Asia Pty Ltd in the following 95 day period from 30 June 2008 to 3 October 2008. The shareholders of TMPL are Mr Triguboff and his wife. Evidence filed by the DCT suggests that MIR Asia Pty Ltd is directed and controlled by Mr Triguboff through entities directed and controlled by him. It might be noted that the terms of the unsecured loan to MIR Asia Pty Ltd prevented repayment before 3 October 2016, made the loan non-assignable and, perhaps most importantly, made interest payable only under circumstances in which MIR Asia Pty Ltd was in fact profitable. The DCT says that these transactions are such that they warrant investigation. Subject to the question of anterior investigation by the deed administrators I find that proposition irresistible. 10 As to the question of the degree of investigation carried out by the deed administrators this much at least should be observed. In their report to creditors the administrators adverted to the familiar grounds available to impugn transactions involving insolvent companies such as, for example, breach of director's duties and uncommercial transactions. Nowhere in the report, however, do the administrators appear to grapple with the question of how it was in the interests of the company to pay dividends to its shareholders and make essentially unsecured loans to an apparently related party which were unrecoverable until 2016, and possibly non-interest bearing, in circumstances where the company appeared to be insolvent. The authors of the report put at nought the significance of the loans on the basis that TMPL had entered into such transactions before but, at least for my part, that raises many more questions than it answers. The DCT also complains that the report to creditors is misleading in a number of ways. These allegations are extensive and include claims that The report contained misleading statements about the value of its wholly owned subsidiary's claim against Universal Studios. In particular, the suggestion in the report that the claim might be worth as much as $15 million was attacked on a number of bases including that the subsidiary had been presented with notices by the DCT seeking recovery from it of TMPL's tax debts and that those claims ranked in preference to any entitlements that TMPL might have. The report misdescribed the merits of TMPL's administrative proceedings to review the assessments. The report omitted the fact that the unsecured loans made by TMPL were to an entity associated with Mr Triguboff. 11 I turn then to the question of whether a stay of the DCT's proceeding should be granted. A few propositions should be accepted. First, the relief ultimately sought by the DCT is an order terminating the deed and that power is conferred on the Court by s 445D. Relief of that kind can be sought by a creditor (s 445D(2)(a)) on a number of grounds which include, relevantly, that information provided to creditors was misleading (s 445D(1)(a)(i)) so long as it was also material (s 445D(1)(a)(ii)) or that the deed is oppressive or unfairly prejudicial to the interests of a creditor (s 445D(1)(f)(i)). Secondly, if an order is ultimately made terminating the deed then the consequence will be that TMPL will be taken to have passed a special resolution winding itself up at the time that the order is made. So much flows from the combined effect of ss 445D, 446B and reg 5.3A.07(1)(a) and (2)(a). 12 Thirdly, that conclusion identifies the substance of the DCT's application as being one whose end is the winding-up of TMPL by a creditor. The application under s 445D, if successful, will result in the termination of one form of external administration and the replacement of it with another. It is true that the form the winding-up takes is that of a voluntary winding-up rather than a winding-up in insolvency. But that characterisation is not to be seen as detracting from the procedure's substantive character as a form of creditor enforced winding-up. 13 Fourthly, that characterisation is material because it brings into play s 14ZZM of the Taxation Administration Act 1953 (Cth). That provision is one of a number in that statute regulating review of taxation decisions. The fact that a review may be on foot whilst the DCT simultaneously seeks to enforce a tax debt is the scenario specifically contemplated by s 14ZZM. It provides that the existence of such a review "does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending" (my emphasis). Wherever a tax amount is being "recovered" and there is a review pending, s 14ZZM requires the observance in the process of that recovery of a statutory fiction, namely, that the review is not pending. That matters in this case because the "use by the Commissioner of the statutory demand procedure in aid of a winding up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue" (Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at 496 [58] per Gummow ACJ, Heydon, Crennan and Kiefel JJ). That authority strictly only decides that the issue of a statutory demand in respect of a tax debt is a recovery covered by s 14ZZM. However, it is evident that that conclusion was reached only because the statutory demand procedure was itself to be seen as part of a creditor's winding-up. It is true that this case is concerned with a deemed voluntary winding-up but, as I have endeavoured to show, the true nature of that winding-up must take account of its occurring by reason of the DCT's application to terminate the deed of company arrangement. Viewed that way it is properly to be seen as having the same character, at least for present purposes, as a creditor's winding-up. 14 Fifthly, once that conclusion is reached it follows that the DCT's present proceeding is one to which s 14ZZM applies so that the recovery constituted by it may continue "as if no review were pending". It is in light of those principles that the question of whether a stay should be granted is to be assessed. I deal first with the prejudice suggested to be suffered by TMPL if the stay is not granted.

Prejudice to the defendants 15 The defendants submitted that they would be prejudiced if the stay were not granted because if the winding-up proceeded (on the termination of the deed of company arrangement) this would mean that the review applications before the Administrative Appeals Tribunal would not proceed. I accept that the deed of company arrangement presently contains terms which permit Mr Triguboff to conduct on behalf of TMPL - and entirely at his expense - the review proceedings before the Tribunal. The point, as I apprehend it, is that once the deed is terminated TMPL will no longer have the benefit of this undertaking by Mr Triguboff. Further, I suppose one may surmise that it is quite likely that the liquidators will have neither the funds nor possibly the inclination to pursue those review proceedings. However, I reject the argument for two reasons. First, a necessary element is the hypothesis that there are review proceedings to be pursued. However, s 14ZZM binds me to proceed on the basis that this is not so and, doing that, it is difficult to avoid the conclusion that TMPL's loss of Mr Triguboff's offer to conduct proceedings which ex hypothesi are not pending cannot be material. Secondly, even without s 14ZZM it is difficult to see why Mr Triguboff's willingness to assist in those proceedings will expire just because the deed of company arrangement does. I accept that he will cease to be bound to provide that support but, in a real sense, it may remain just as much in his commercial interest to continue them. In particular, given the fact that the DCT's concerns arise from the circumstances in which a substantial dividend of $1.9 million was paid to Mr Triguboff and his wife and unsecured loans of about $3 million were made to entities apparently controlled by him, it may be that it will continue to be in his interests to seek the winding-up's early end by establishing that the notices of assessment should be set aside. There are no procedural difficulties in Mr Triguboff seeking the leave of the Court to pursue the review applications on behalf of TMPL should the liquidators themselves refuse to take that course: HFGC Nominees (No 2) Pty Ltd v Hancock as Liquidator of 246 Arabella Investments Pty Ltd (in liquidation) [2010] FCA 1005 at [6]-[9]. For related reasons I am unable to accept, as the defendants submit, that all the money thus far expended on those proceedings will be wasted if TMPL is placed in liquidation as a result of the deed's termination. 16 The defendants also submitted that if subsequently the winding-up were reversed because the Commission's status as a creditor was removed by reason of TMPL's success in the Tribunal this would leave a confused state of affairs. In particular, it was suggested that questions as to the validity of the liquidators' actions might arise. I reject this submission not only because it requires one to assume the existence of the review proceedings contrary to s 14ZZM but also because the suggested problems are elusive. The success of TMPL in the review proceedings will not have the automatic effect of vitiating the winding-up. To the contrary, the winding-up will have occurred because of a valid order of this Court made at the suit of a person who, at the time of its making, was a creditor. To the extent there are any such questions- and none was nominated - s 511(1) provides an avenue whereby they may be resolved ("The liquidator, or any contributory or creditor, may apply to the Court: (a) to determine any question arising in the winding up of a company"). Any such problem may be addressed by the liquidator applying during the winding-up process. 17 Next it was said that there was a risk that the adjudication by this Court of the DCT's application to terminate the deed might give rise to a res judicata with respect to the existence and amount of TMPL's tax debt. I do not see how this can be so. The order will, no doubt, stand for the proposition that at the time the order was made the DCT was such a creditor but I am unable to grasp why that would thereafter prevent TMPL from claiming that the DCT had lost that status by reason of successful review proceedings. 18 I do accept, as Mr Stevens of counsel for the defendants submitted, that should the review proceedings result in the setting aside of the notices of assessment this would mean that the legal expenses associated with the DCT's application to terminate the deed would have been wasted. However, I do not think that this is to be taken into account because of s 14ZZM - I am required to proceed on the basis that the review proceedings are not pending. 19 I turn then to the position of the DCT

Prejudice to the plaintiff if the stay were to be granted 20 I reject at the outset the defendants' argument that little prejudice was occasioned to the DCT by a stay because his proceedings were likely to fail. I do not see his proceedings as having that character. More substantial was the argument advanced on the defendants' behalf that DCT would be in the same position regardless of whether a stay was granted or not. The point here was that the deed of company arrangement required the deed administrators to admit to proof whatever the Commission was ultimately found to be entitled to. Coupled with an undertaking by the deed administrators that they would not give effect to the deed until such time as the review proceedings were brought to their ultimate conclusion this afforded the DCT full protection from any prejudice arising by reason of delay. 21 This argument is not persuasive. The DCT suffers the prejudice that the processes which a winding-up will set in train - further inquiry into the payments out of TMPL and the possibility of the use of compulsory process incidental thereto - are delayed. The defendants hinted that the relation back day for the purposes of Part 5.7B of the Act (entitled "Recovering property or compensation for the benefit of creditors of insolvent company") was arguably August 2009. It was on 5 August 2009 that the second meeting of creditors (in the circumstances already discussed) resolved to adopt the deed. The DCT proceeded on the basis that the relation back day was 1 July 2009 when the administrators were initially appointed. The DCT's submission is to be preferred. The deemed members' voluntary winding-up wrought by reg 5.3A.07 on the making of an order by a court under s 445D ensures that this would be a case where the deed of company arrangement was in place immediately prior to the resolution so that s 513B(c) would apply. This means that the relation back day is the s 513C day which, in this case, is the day the administration commenced: Public Trustee (Qld) v Octaviar Ltd (2009) 73 ACSR 139 at 194 [184] per McMurdo J. 22 The reason that is material is because s 588FF(3)(a)(i) requires claims concerning voidable transactions to be commenced (or at least an application by the liquidator for an extension of time: subs (3)(a)(ii)) within 3 years of the relation back day and this will be 1 July 2012. Given that the review proceedings may well go on appeal it is possible that a stay of these proceedings may result in the processes of investigation not commencing until after the limitation period has expired. Even if that were not so, however, recovery proceedings of the kind in contemplation cannot simply be commenced out of thin air. The entire process of investigation and inquiry will need to be set in train and substantially completed before such proceedings are likely to be able to be commenced. It is not difficult to see in these circumstances that it may be quite difficult for that process to be adequately completed by the middle of 2012. The fact that the Act imposes a three year deadline on those proceedings and the fact that one of those years has already been spent on this proceeding provides a compelling reason for not staying it. Indeed, it provides a compelling reason for determining the DCT's application at the earliest available juncture. 23 Further, the DCT submitted that the undertaking proffered by the deed administrators not to distribute the deed fund until after the determination of the review proceedings in the Tribunal was deficient. This was because it would not stop them distributing the fund once those proceedings were concluded in the Tribunal even if they then went on appeal to this Court. There was, therefore, the real possibility that the deed might terminate on its own terms, once the Tribunal proceedings were completed, by reason of the fund's distribution. If that were to occur it would be impossible to terminate the deed and the DCT would therefore lose the advantage of a relation back day of 1 July 2009. The inability to terminate an already terminated deed is supported by Parkview Constructions Pty Ltd v Tayeh (2009) 71 ACSR 65 at 75 [53]-[54] per Barrett J and for reasons already given the relation back day is 1 July 2009. However, the argument overlooks cl 7.6 of the deed, which requires the deed administrators to admit to proof the amount of the DCT's claim as determined by the Tribunal, the Federal Court or "such other court as finally determines the amount owing". The effect of this clause is to prevent the distribution by the deed administrators until such time as the DCT's entitlement is determined. It follows that I reject this aspect of the DCT's argument. However, even allowing that, the prejudice to the DCT caused by any stay of this proceeding will be substantial.

Other matters 24 The defendants sought to bring to account two other matters on the question of the exercise of the discretion. First, it was said that the Tribunal proceedings might well deny the DCT standing to pursue the present case. Of course this is true but so much can be said about any enforcement procedure by the DCT and it is precisely to such matters that s 14ZZM speaks. Secondly, it was said that nothing would be gained by not granting a stay because the defendants would, in any event, soon amend their defence to plead that the DCT was not a creditor and that this would generate within this case the very same issues pending in the review proceedings. This submission should be rejected. Such a plea would be liable to be struck out because of s 14ZZM: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd 237 CLR at 494 [52] citing with evident approval Deputy Commissioner of Taxation v Niblett (1965) 83 WN (Pt 1) (NSW) 405 at 411 ("These pleas [that the taxpayer was never indebted] were struck out, a result which Asprey J saw as required by the provisions of the Assessment Act…")

Conclusions on whether a stay should be granted 25 I am clearly of the view that a stay of this proceeding would be quite inappropriate. As explained above, I do not think that any of the suggested prejudices to the defendants are open to be considered by reason of s 14ZZM. On the other hand, I am satisfied that the three year limitation period on the commencement of voidable transaction proceedings poses real timing risks for the DCT if this proceeding is delayed. Even if I took a different view about the operation of s 14ZZM I do not think that any real prejudice, apart from one matter, is shown. The one matter is that if the review proceedings were successfully terminated in TMPL's favour prior to the present proceeding coming on there would be a saving in legal fees. However, I do not regard that species of prejudice as outweighing the risk posed to the DCT by the expiry of limitation periods or being of such an extent as to require this Court's intervention under s 23 of the Federal Court of Australia Act 1976 (Cth). 26 Even if I had been satisfied that the balance of convenience favoured the granting of a stay I would have declined to grant it for the further reason that there has been unacceptable delay in bringing the application. The deed was executed on 7 August 2009 and the present proceeding was commenced on 18 September 2009. The application for a stay was made nearly a year later on 31 August 2010. No evidence was put before me to explain this 11 month delay. Mr Stevens submitted that the review proceedings had been fixed for hearing on 26-30 July 2010 but that this hearing had been vacated on the DCT's application and postponed to 7-11 February 2011. It was only the vacation of that hearing which had resulted in the need to bring the present application. I cannot accept this argument. It assumes impermissibly that both of the review proceedings were expected to be completed this year. But the fact is that only one of the review proceedings was listed for 26-30 July 2010, namely, the Lazard Frères proceedings. The proceedings relating to Pitch Black were not so fixed and there can have been no expectation in respect of those proceedings that they would be completed in July this year at all. The explanatory power of the proffered answer is, therefore, insufficient to expose why it is that the stay was sought only in August. Further, the subtly conveyed suggestion in the defendants' submission that the DCT was somehow responsible for the adjournment of the Lazard Frères proceedings evaporates entirely when it is brought to account, as Mr Brabazon SC for the DCT correctly observed, that the DCT's adjournment application was made necessary by reason of the late service of evidence by TMPL. It follows that the present application is attended by unexplained delay which by itself would have more than sufficed its refusal. 27 The application should be dismissed with costs. There should be a directions hearing within 7 days to chart the proceeding's future despatch. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.