Global Network v Commissioner of Taxation

Supreme Court of NSW|2004-05-28|Before: Austin J, Gummow J

CITATION : Global Network v Commissioner of Taxation [2004] NSWSC 474 HEARING DATE(S) : 28/05/2004 JUDGMENT DATE : 28 May 2004 JURISDICTION: Equity Division JUDGMENT OF : Master Macready at 1 DECISION : Paragraph 22

CATCHWORDS : Corporations Law. Application to set aside demand relying on s459J(1)(b). Held defect was a defect in demand and s45GJ(1)(a) applied. No substantial injustice. Proceedings dismissed. PARTIES : Global Network Services Pty Limited, Deputy Commissioner of Taxation of the Commonwealth of Australia FILE NUMBER(S) : SC 4458/2003 COUNSEL : Ms Lee for plaintiff E. Chiaw for defendant SOLICITORS : Middletons for plaintiff Australian Taxation Office Legal Practice

4458/03 - GLOBAL NETWORK SERVICES PTY LIMITED v DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

1 MASTER: This is an application to set aside a statutory demand which was served by the defendant upon the plaintiff. The demand was dated 29 July 2003 and claimed an amount of $232,219.35. The application to set aside was made on the basis that there is some other reason to set aside the demand pursuant to s 459J of the Act. The particular problem arises because the demand claims a total, to which I have referred, and splits it up into three separate components. Items (b) and (c) in the schedule to the demand are fairly clear. They are particular sums for to particular assessments for income tax and indeed the plaintiff does not dispute these. The first part is item (a) which is in these terms: "Running Balance Account deficit debt as at 29 July 2003 in respect of amounts due under the BAS provisions as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 ("the ITAA 1997") [BAS provisions include, generally: the goods and services tax provisions, the PAYG withholding provisions, the PAYG instalment provisions, the fringe benefits tax instalment provisions and the deferred company instalment provisions] and the general interest charge payable under section 8AAZF of the Taxation Administration Act 1953 ("The TAA 1953"), being a debt due and payable by the company pursuant to section 8AAZH of the TAA 1953." 2 It can be seen that as it is described it is an apparent sub-total defined in a running balance account dealing with a variety of different taxes, including PAYE, fringe benefits tax and deferred company instalments. 3 The basis of the application to set aside under s 459J is that there is some other reason to set aside the demand because it is not immediately apparent on the face of the demand how the amount is calculated. There is a general summary and just a statement of an amount. 4 The plaintiff does not dispute that there is a substantial amount owing and in the affidavit in support have raised questions as to whether or not there has been an attempt to compound the amount. That argument was abandoned and the argument concentrates around s 459J. 5 A matter was raised that the affidavit in support which was filed in time, namely, that of Debra Janine Taylor sworn 21 August 2003, did not identify that ground. The most recent exposition of case law in this area is that of Austin J in POS Media v B Family (2003) NSWSC 147. There his Honour said: "26 The principle asserted by the defendant is that the plaintiff cannot succeed on the 'no debt' ground, because that ground was not set out in Mr Patkin's affidavit of 9 December 2002, and cannot be characterised as an extension of the grounds set out in that affidavit. 27 The principle is said to arise out of s 459G, which states: '459G (1) A company may apply to the Court for an order setting aside a statutory demand served on the company. (2) An application may only be made within 21 days after the demand is so served. (3) An application is made in accordance with this section only if, within those 21 days: (a) an affidavit supporting the application is filed with the Court; and (b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.' 28 In David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 the High Court of Australia held that an application to set aside a statutory demand is to be made within 21 days of service of the demand, and not at some time thereafter, and that to treat s 1322 as authorising the Court to extend the 21 day period would be to deprive the word 'only' in s 459(2) of effect (per Gummow J at 276). The David Grant case implied that the plaintiff must file and serve, within the 21 day period, not only the application but also an affidavit falling within the description of 'an affidavit supporting the application'; in assessing whether these requirements have been satisfied, the Court is not to have regard to any supplementary affidavit filed and served by the plaintiff at a later time. 29 Section 459G does not prescribe the content of the application. That is left to the Rules of Court, which are now substantially uniform. The application is made by an originating process, which according to Rule 2.2 of the Corporations Rules of the various Courts, and the associated Form 2, must set out the relief sought and the sections of the Corporations Act under which the proceeding is brought, but need not plead the grounds upon which the relief is sought. The defendant's interest in knowing the plaintiff's claim is catered for by the general rules of Court regarding particulars, and the Court's power to order that the matter proceed by pleadings or points of claim in an appropriate case. 30 In the absence of authority, one might have thought that an affidavit would 'support' such an application if it deposed to facts that would ( alone or together with other evidence) justify the grant of some such relief as the application sought, once the plaintiff articulated (at the hearing, if not earlier) the reasoning by which those facts would warrant that relief. One would not expect the supporting affidavit to supply the intermediate reasoning, in the nature of a pleading. Assertions in an affidavit in the nature of submissions are normally held inadmissible, if challenged. 31 However, the law has taken rather a different course. In Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452, Sundberg J was dealing with an application to set aside a statutory demand on the basis that there was a genuine dispute as the existence of the debt. Perhaps influenced by a supplementary Federal Court Rule in force at the time, he said (at 459): 'In a s 459H(1)(a) case, the affidavit must in my view disclose facts showing there is a genuine dispute between the parties. A mere assertion that there is a genuine dispute is not enough. Nor is a bare claim that the debt is disputed sufficient. It follows from the fact that the affidavit need not go into evidence, which is the customary function of affidavit, that it may read like a pleading.' 32 Those observations have been taken up and applied frequently in first instance decisions - for example, Zenaust Imports Pty Ltd v Olympic Chemicals Works Co Ltd (1998) 28 ACSR 465; Z-Tek Computers Pty Ltd v Aus Linx International Pty Ltd (1997) 15 ACLC 1233; SMEC International Pty Ltd v CEMS Engineering Inc (2001) 38 ACSR 595. In the Zenaust case, however, Santow J added (at 469) the qualification that an affidavit in support of a notice to set aside a statutory demand could not fairly be expected to rise higher than the level of articulation of the claimed debt in the statutory demand. 33 These cases dealt with the minimum content requirements for the affidavit in support of the application. A corollary of their reasoning is that if the affidavit discloses certain grounds only, the plaintiff should be limited to those grounds at the hearing. That proposition was accepted in D & S Group of Companies Pty Ltd v O'Connor Investments Pty Ltd (1997) 15 ACLC 1794, where Perry J remarked (at 1798), in respect of an affidavit filed on behalf of the plaintiff well after the expiration of the period of 21 days, 'in so far as it raises any ground offered in support of the application not identified in the affidavit ... filed within time, [it] could not be taken into account in determining the application'. The same point was accepted by Mandie J in Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (in liq) [2000] VSC 397. 34 Those decisions should be compared with Callite Pty Ltd v Adams [2001] NSWSC 52. In that case the statutory demand was by solicitors who sought to recover in respect of fees charged for legal work. At the hearing the plaintiff (the client) wanted to assert that there was a genuine dispute because the defendant (the solicitor) had not complied with mandatory requirements of the Legal Profession Act 1987 (NSW). The affidavit supporting the client's application to set aside the statutory demand annexed the relevant invoices but did not assert the ultimate facts that would allow the legal conclusion to be drawn that there had been no proper fee disclosure as required by the Legal Profession Act. However, it was evident on the face of the invoices that they did not comply with the requirements of that Act in various ways. Santow J held that it was unnecessary for the affidavit to point out explicitly that omissions had occurred, since it was self-evident from a perusal of the annexed accounts that they lacked certain mandatory inclusions. He concluded (at [12]) that : 'the legal consequences which follow are not required to be pleaded in such an affidavit'. 35 We now have the benefit of three decisions by an intermediate appellate court. The Full Court of the Supreme Court of Western Australia has followed Sundberg J's observations and their corollary in Meadowfield Pty Ltd v Gold Coast Holdings Pty Ltd (in liq) [2001] WASCA 360; Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179 and Financial Solutions Australasia Pty Ltd v Predella Pty Ltd (2002) 167 FLR 106. However, the Financial Solutions case has reduced the Graywinter 'principle' to a more fact-specific inquiry. 36 The Meadowfield case applied Sundberg J's observations about the 'minimum requirements' for the affidavit without adding anything of general application. In the Energy Equity case, the question was whether the plaintiff could seek to establish at the hearing that it had an offsetting claim in negligence in relation to a particular contract, when all that had been relevantly said in the affidavit filed within time was that there were 'a string of off-setting claims'. After examining the authorities Wallwork J (with whom Steytler J and Olsson A-UJ agreed) concluded (at 185, in a passage described in the Financial Solutions case as an obiter dictum): 'In my view it now seems to be accepted that an affidavit filed outside the 21-day period which raises a new ground or grounds to set aside a statutory demand (as opposed to an affidavit which expands on grounds in an earlier affidavit which has satisfied the threshold test) cannot be used in an application of this nature.' 37 In the Financial Solutions case, the plaintiff contended at the hearing that there was a genuine dispute as to the existence of the debt claimed in the statutory demand, for two reasons. First, the plaintiff said that the defendant claimed as assignee under a deed of assignment which mistakenly identified the deeds of loan to which the assignment related, and secondly, the plaintiff said that the defendant was not a permitted assignee under the terms of the deeds. The affidavit supporting the application said only that the plaintiff had not sighted the deed of assignment and genuinely believed that the assignment might be void and ineffective, and was seeking discovery of the documents referred to in the statutory demand in order to establish whether the defendant had a legally enforceable claim against it. 38 Applying the observations of Sundberg J in Graywinter , and also the views of Young J in John Holland Construction and Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 12 ACLC 716, Parker J (with whom Anderson and Scott JJ agreed) held (at 115) that the material facts on which the plaintiff intended to rely to show a genuine dispute were sufficiently, 'though less than ideally', set out in the affidavit and its annexures. He observed, applying the views of Young J in the John Holland case, that the affidavit went beyond mere assertion. As to Sundberg J's observations, he said that they were apt to the circumstances with which Sundberg J was concerned, but 'there is reason to hesitate and hold back from acceptance of the apparent effect of the submission for Financial Solutions that the concluding paragraph of the passages cited earlier from Sundberg J's reasons in Graywinter reveal a settled and universal principle, which must be satisfied by an affidavit before it can be accepted as 'supporting the application' within the meaning of s 4 59G(3)(a) and as satisfying the jurisdictional requirement being considered. The statutory yardstick remains that the affidavit should support the application. The precise nature of the application may well influence what this requires.' 39 Barrett J of this Court carefully reviewed the case law in Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd [2002] NSWSC 45, although his judgment was delivered before the Financial Solutions decision. Barrett J's conclusions were as follows:

'[21] It is thus reasonably clear that the relevant concept of "raising" or "identifying" a particular ground involves some verbal delineation of that ground in the s 459G(3)(a) affidavit. If a debt of $10,000 were claimed as one year's interest under a contract providing for interest at the rate of 9% per annum on a principal sum of $100,000, it would not, in my opinion, be sufficient for the affidavit to annex the loan agreement and say no more. It would have to refer at least to the connection between the contract and the debt claimed and put in issue the calculation of interest - even if it merely said, "The debt does not accord with the annexed contract". [22] The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiable with one or more of the grounds made available by s 459H and s 459J. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period.'

40 With respect, these observations are a logical application of the principle enunciated in Energy Equity. However, they might arguably take Sundberg J's observations in Graywinter further than the Financial Solutions case would now take them, and be inconsistent with the decision in Callite. If it was unnecessary for the supporting affidavit in Callite to do anything more than annex the solicitor's invoices, on the face of which there were non-compliances with the Legal Profession Act, why would it be necessary for the supporting affidavit in Barrett J's hypothetical example to do anything more than annex the loan agreement showing a different rate of interest from the one claimed?

6 It is to be noted that in his Honour's reference to the decision of Catlite one has to take account of the view there expressed by Santow J that it is unnecessary for the affidavit to point out explicitly what omissions had occurred since it was self-evident from the material. He concluded that the legal consequences which followed are not be pleaded in such an affidavit. 7 Although there may be some debate about that matter, it seems this view is appropriate. The question which arises is whether the particular uncertainty about the calculation of the relevant amount in the demand was adequately dealt with in the affidavit in support. The affidavit in support did not of course specifically direct attention to this particular matter nor did it say that the application was made under s 459J. 8 However, a perusal of the initial paragraphs of the affidavit indicates the substantial difficulty which the deponent had in trying to reconcile the amount claimed by the Commissioner. There are attempts to reconcile referred to in paragraph 11. The deponent is there saying that she is not able to confirm the general interest charge and any payments and credits for certain particular years. This clearly indicates a problem with the starting point. If there is any doubt that there was some problem with the starting point, it is put to rest by a letter of 11 September 2003 written by the Australian Tax Office to the plaintiff's lawyers which seeks to explain how a balance is arrived at. That letter is four pages long and contains twenty-three paragraphs of an explanation substantially most of which go to the justification of the amount shown in paragraph (a) in the statement of demand. 9 It seems to me in the circumstances that the dispute was well and truly flagged and accordingly there is jurisdiction to entertain the application. 10 The authority referred to in support of the proposition that the demand should be set aside was the case of Topfelt Pty Limited v State Bank of New South Wales Limited. That is a decision of Lockhart J, reported, inter alia, at 120 ALR 156. There the statutory demand claimed an amount of a debt in these terms: "$179,722.73 together with interest from 11 March 1993 to date and continuing." 11 His Honour ultimately set the demand aside. There are a number of passages relied upon to justify the submission that the same should apply here. Page 170 of the report I have cited His Honour said the following: "A creditor who issues a statutory demand under the Corporations Law gains the benefit of the presumption of insolvency if the notice is not complied with: and the additional benefit that the company may not oppose the application to wind it up on a ground relating to a defect in the statutory demand, without the leave of the court, because of the provisions of s 459S of the Corporations Law. It is not asking too much that creditors who issue statutory demands under the Corporations Law should ensure that the demands are expressed in clear, correct and unambiguous terms. If the creditors wish to have the benefit of the presumptio9n of insolvency, the least they can do is to tell the debtor companies in clear terms what amounts are due, whether they include interest or not, and, if so, the amount." 12 After dealing with another argument, his Honour went on these terms: "The demand is erroneous because it cannot be complied with on its face even allowing for misstatements. The applicant must make enquiries of one kind or another in order to ascertain the amount of interest that is said to be payable, whether he makes the enquiries from his solicitor or from the Supreme Court or others.

I take into account the fact that the service of the demand comes at a late stage in the curial conflict between the parties, and the sufficiency of the demand must be examined in the setting of contested litigation in the Supreme Court to which reference was made earlier.

There is no evidence before the court from the applicant of any specific injustice that is has suffered or may suffer because of the defects in the statutory demand. Indeed, it vigorously contested the proceedings in the Supreme Court relating to the exercise by the respondent of its power of sale, both at the trial and appellate level.

Nevertheless, it is not the obligation of a debtor company to calculate the interest which the creditor calls upon him to pay; to make certain and specific something which the creditor has left uncertain and unspecified. Also, in winding up proceedings the court acts not merely inter partes, but in the public interest. An order for winding up operates in rem. It is the public interest that provisions of the Corporations Law which require a statutory demand to state the amount of a debt that is due and payable, should be observed." 13 His Honour went on to set aside the demand without the need to consider whether there was any substantial injustice which is referred to in s 459J(1)(a). Section 459J is in the following terms: " 459J(1) (Defect or other reason) On an application under section 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside: or (b) there is some other reason why the demand should be set aside. 459J2) (Mere defect) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect." 14 After the decision of Topfelt there was a debate in the cases about the interrelationship between subss (a) and (b). The debate has been settled to a certain extent by the decision of the Full Federal Court in Spencer Constructions v G&M Aldridge (1997) 15 ACLC 1001. The decision adopts the narrower view that if there is a defect in the demand it can only be dealt with under s 459J(1)(a) and not under 459J(1)(b). The first of course brings in the requirement that there be no substantial injustice. The facts in this case do not disclose any substantial injustice. So much is conceded by the plaintiff. The question thus becomes whether or not the difficulty in interpreting the amount claimed to be owing in subpara (a) of the demand is really what is properly described as a defect in the demand or whether there is in fact some other reason for which the demand could be set aside. 15 It is interesting that in Spencer Constructions v G&M Aldridge the Court had the following to say about Topfelt: "Topfelt was relied on by the appellant in support of the submission that a statutory demand can be set aside under s 459J(1)(b) because of defects in the demand even though there is no substantial injustice caused by the defects. We doubt that Lockhart J was expressing such a view, but if he was we would respectfully differ from it. Rather, Lockhart J based his conclusion on the basis that the statutory demand could not in fact be complied with because it was not the obligation of a debtor to calculate the interest the creditor calls upon the debtor to pay. This factor is not accurately described only as a 'defect in the demand'; it is more than a defect as the debtor was unable to comply with the notice without making enquiries which it was not obliged to make. The substantive point was that for the purposes of the statute, in these particular circumstances, there cannot be a failure to comply with the demand made by the creditor. Accordingly, in Topfelt the issue of substantial injustice under s 459(1)(a) did not arise as there was a reason under s 459(1)(b), other than a defect in the demand, for setting the demand aside." 16 It can be seen from what the Court was there saying that his Honour's decision may be explained on the basis that the actual problem was not only simply a defect in the demand but it was a more substantial matter, namely, the debtor was unable to comply without making further enquiries which it was not obliged to make. In particular what the Court was focusing on were the reasons of Lockhart J which related to the question of interest and the fact that if a debtor was to comply he had to go away and make appropriate calculations and identify a source or an amount of interest before he could comply. It was on this more general basis it was suggested there was not just a defect in the demand but a problem with the demand which would justify the setting aside for some other reason. 17 If one turns to the form of the actual section in the demand which I quoted above, there is no suggestion of something additional having to be added on to the amount which is claimed. It is said to be an aggregate of a series of particular types of debts. 18 In these circumstances, it seems to me that the difficulty facing the debtor is really a difficulty in understanding the demand itself and therefore a defect in the demand. 19 It is useful to note the definition of defect in the Act. That definition is as follows: "defect, in relation to a statutory demand includes: (a) an irregularity; and

(d) a misdescription of a person or entity." 20 What we are here dealing with is probably a misdescription of a debt. The debt has been described by general words rather than by more particular words to arrive at a total. 21 In the circumstances it seems to me that we are in truth dealing with a defect in the demand itself. In these circumstances as there has been no demonstration of a substantial injustice, the demand should not be set aside. 22 Accordingly I dismiss the proceedings and order the plaintiff to pay the defendant's costs. It is submitted that because of the difficulties with the demand that is why we are here today. I do not think that is really a correct characterisation of it and accordingly I will not vary the costs order which I have made.

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Legal Profession Act 1987(NSW)

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