Hall (as liquidators of Reynolds Wines Limited) v Commissioner of Taxation

Supreme Court of NSW|2004-10-25|Before: Barrett J, Mr P

Reported Decision : 51 ACSR 173 (2004) 22 ACLC 1497

CITATION : Hall (as liquidators of Reynolds Wines Limited) v Commissioner of Taxation [2004] NSWSC 985 HEARING DATE(S) : 11/10/04 JUDGMENT DATE : 25 October 2004

JURISDICTION: Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Short minutes to be brought in

FILE NUMBER(S) : SC 2685/04 Mr R A Dick - Plaintiffs Ms E Whan, Solicitor - Defendant/Respondent COUNSEL : Mr L J Aitken - First Applicant Mr P A Somerset, Solicitor - Second Applicant Mr D Goldman, Solicitor - Third Applicant Blake Dawson Waldron - Plaintiffs Australian Government Solicitor - Defendant/Respondent SOLICITORS : PMF Legal - First Applicant Abbott Tout - Applicant Deacons - Third Applicant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2685/04 - GREGORY WINFIELD HALL & ANOR (AS LIQUIDATORS OF REYNOLDS WINES LIMITED) v COMMISSIONER OF TAXATION JUDGMENT 1 On 4 May 2004, Mr Hall and Mr Carter, the liquidators of Reynolds Wines Limited and Reynolds Vineyards Pty Limited, filed an originating process claiming, among other orders, an order declaring certain transactions involving payments to the defendant, Commissioner of Taxation, to be voidable transactions within the meaning of Part 5.7B of the Corporations Act 2001 (Cth) and an order that the Commissioner of Taxation pay to the two companies a sum of $77,750 and a sum of $582,934. The first of these sums relates to Reynolds Vineyards Pty Limited. The claim in relation to it was dealt with in my judgment of 11 October 2004 (Hall (as liquidator of Reynolds Vineyards Pty Ltd) v Commissioner of Taxation [2004] NSWSC 950). These reasons are concerned with the claim for $582,934 which relates to Reynolds Wines Limited which I shall call "the Company". 2 The claim of the liquidators of the Company against the Commissioner is a claim under s.588FF. It is pleaded in a statement of claim filed on 10 September 2004. Paragraph 9 of the statement of claim reads: "The Payments were insolvent transactions within the meaning of section 588FC of the Act in that: (a) the Payments were unfair preferences given by Reynolds Wines to the defendant within the meaning of section 588FA of the Act; and (b) the Payments were made at a time when Reynolds Wines was insolvent; or (c) in the alternative to paragraph 9(b) herein, Reynolds Wines became insolvent as a result of making the Payments." 3 By a defence filed on 17 September 2004, the Commissioner admitted paragraph 9. The case is therefore one in which, in the absence of some other factor, there will be no contest on the issue of insolvency central to the liquidators' claims. 4 By an interlocutory process filed on 15 July 2004 in the proceedings initiated by the liquidators' originating process, the Commissioner claimed certain relief against each of four persons said to have been directors of the Company at relevant times. I shall refer to them as "the directors". The Commissioner claims against the directors declarations and orders based on s.588FGA(2) of the Corporations Act and the proposition that each director is, by virtue of that section, liable to indemnify the Commissioner in respect of any loss or damage resulting from any order under s.588FF requiring the Commissioner to pay money to the Company. The Commissioner alleges a right to be indemnified by each of three of the directors to the extent of $537,100. In the fourth case, the sum claimed is $311,916. In initiating these claims against the directors, the Commissioner is proceeding under s.588FGA(4). Neither the liquidators' claims against the Commissioner nor the Commissioner's claims against the directors have yet been determined. 5 On 11 October 2004, I heard submissions in relation to three further interlocutory processes filed in the proceedings brought by the liquidators against the Commissioner. Each of these was filed by one of the directors. In two cases, the first relief sought in the interlocutory process is a grant of leave for the applicant director to defend the claim initiated by the liquidators' originating process against the Commissioner on terms that the applicant director will be bound by every decision in that claim and will be treated as if a party to that claim on any question of costs. There is also a claim for a declaration that, notwithstanding the making of the first order, the applicant director will be entitled to raise against the Commissioner any matters he may properly wish to raise in response to the Commissioner's interlocutory process filed on 15 July 2004, whether or not any such matter is or may be raised by the Commissioner as against the liquidators. In the third case, there is an application for leave to defend the liquidators' claim on such terms as the court thinks fit. 6 Since the discussion that is to follow as to the proper disposition of the directors' interlocutory processes involves the construction and interpretation of s.588FGA of the Corporations Act, it is convenient to set out the section in full: " Directors to indemnify Commissioner of Taxation if certain payments set aside

(1) This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any of the following provisions of the Income Tax Assessment Act 1936 : (aa) section 220AAE, 220AAM or 220AAR; (a) section 221F (except subsection 221F(12)), section 221G (except subsection 221G(4A)) or section 221P; (b) subsection 221YHDC(2); (c) subsection 221YHZD(1) or (1A); (d) subsection 221YN(1); (e) section 222AHA; or under a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 . (2) Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. (3) An amount payable to the Commissioner under subsection (2): (a) is a debt due to the Commonwealth and payable to the Commissioner; and (b) may be recovered in a court of competent jurisdiction by the Commissioner, or a Deputy Commissioner of Taxation, suing in his or her official name. (4) The Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under subsection (2). (5) A person who pays an amount under subsection (2) has the same rights: (a) whether by way of indemnity subrogation, contribution or otherwise; and (b) against the company or anyone else; as if the payment had been made under a guarantee: (c) of the liability referred to in subsection (1); and (d) under which the person and every other person who was a director of the company as mentioned in subsection (2) were jointly and severally liable as guarantors." 7 The relevant part of s.588FF(1) should also be quoted: "Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction . …" 8 The claims the Commissioner maintains against the directors are claims for orders under s.588FGA(4) requiring payment of amounts payable by the directors under s.588FGA(2). In initiating those claims by interlocutory process in the proceedings already commenced by the liquidators, the Commissioner has followed the course discussed in Condon (as liquidator of Justinprint Pty Ltd) v Commissioner of Taxation (2004) 49 ACSR 681. The fact that an order in favour of the Commissioner under s.588FGA(4), if made, is to be made "in" the proceedings in which a liquidator seeks a s.588FF order for the payment of money by the Commissioner was there held to bring the Commissioner's claim within rule 2.2(1)(b) of the Supreme Court (Corporations) Rules 1999, rather than rule 2.2(1)(a), so that interlocutory process rather than originating process is the appropriate means of initiating the claim for the s.588FGA(4) order. The same feature of s.588FGA(4) (that is, the requirement that, if the Commissioner chooses the s.588FGA(4) route, the order under that section be sought "in" the liquidator's recovery proceedings) also means that the Commissioner's claim under s.588FGA(4) is not a "cross-claim" as defined by Part 1 rule 8 of the Supreme Court Rules (see Condon at [15] - [20]). 9 Because the Supreme Court (Corporations) Rules work in this somewhat anomalous way and the general provisions of the Supreme Court Rules as to cross-claims (although logically of assistance) do not operate, there is uncertainty as to the appropriate way of conducting a proceeding such as the present where a liquidator claims against the Commissioner under s.588FF, the Commissioner in turn resorts to s.588FGA(4) in an attempt to secure an order enforcing the indemnity arising under s.588FGA(2) and the persons subjected to the s.588FGA(4) claim wish to be heard not only on the narrow questions directly relevant to s.588FGA (including any defences under s.588FGB) but also on the substantive question under s.588FF whether there will be any liability of the Commissioner upon and in relation to which s.588FGA(2) will operate. (No such uncertainty arises where the Commissioner seeks to enforce the s.588FGA(2) indemnity by some means other than an order under s.588FGA(4): see Condon at [18]). 10 A number of issues were canvassed before me upon the hearing of the directors' interlocutory processes. The following were seen to be the relevant questions: 1. Do the directors concerned require leave to defend the liquidators' claim against the Commissioner under s.588FF and, if so, should such leave be granted? 2. Should the relevant directors be made defendants in the proceedings brought by the liquidators against the Commissioner? 3. Should the court entertain and determine the liquidators' s.588FF claim against the Commissioner (on the basis of the concession, clearly foreshadowed by the Commissioner, that the company was insolvent at the relevant time) separately from and in advance of the Commissioner's claim under s.588FGA(4) for orders that the directors make payments to the Commissioner? 11 The general approach taken by the directors is simple and straightforward: if the liquidators succeed in their s.588FF claim against the Commissioner, the basis for indemnity by directors under s.588FGA(2) will come into existence, subject only to the narrow defences or exceptions provided for in s.588FGB; it is only fair and just that directors should have an opportunity to contest the liquidators' right to the payment order they seek against the Commissioner; and this is particularly so if, as here, the central issues as between the liquidators and the Commissioner will be disposed of by admissions made by the Commissioner, including an admission on the pivotal issue of the Company's insolvency at material times - such an admission being, at least in the abstract, a sound basis for deciding such a case: Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd) v Commissioner of Taxation (No 2) (2004) 49 ACSR 325, Cooper (as liquidator of Wanted Worldwide (Australia) Pty Ltd) v Commissioner of Taxation [2004] FCA 1063; Hall (as liquidator of Reynolds Vineyards Pty Ltd) v Commissioner of Taxation (above). 12 It was submitted by Mr Dick of counsel, who appeared for the liquidators, that the liquidators' claim against the Commissioner under s.588FF should proceed separately from, and not become linked with, the Commissioner's claims for orders under s.588FGA(4) against the relevant directors. Section 588FGA(4) refers to an order already made against the Commissioner. It says that the court may, "in the proceedings in which it made" [emphasis added] that order, order a person to pay to the Commissioner an amount payable by the person under s.588FGA(2). This, it was submitted, indicates an intention that the question whether a s.588FGA(4) order should be made should only be addressed after the principal order has been made and all matters relevant to a decision to make it have been adjudicated as between the liquidator and the Commissioner. 13 The notion that the Commissioner's claim against directors is to be treated as separate and distinct from the liquidator's claim against the Commissioner is said to be supported by the fact that no express provision of the Act discloses any intention of creating or preserving for directors any opportunity to be party to the controversy between the liquidator and the Commissioner. That controversy, it is said, can and should be left to be litigated between those parties alone. If directors, when attacked under s.588FGA(4), wish to re-litigate the solvency question, the court can, it is argued, fashion adequate means to ensure their opportunity to do so. 14 Mr Dick also submitted that if, as here, the Commissioner concedes, as against the liquidators, the issue of insolvency that is core to the liquidators' s.588FF claim, that concession will not prejudice the directors. This is because the concession will not cause any presumption to arise under s.588E(8) as against the directors - first, because the Commissioner's application for a s.588FGA(4) order in the proceedings brought by the liquidators against the Commissioner is not, in light of the definition of "recovery proceeding" in s.588E(1), "another recovery proceeding"; and, second, because the concession as to insolvency will mean that the matter is not one that, in terms of s.588E(8), "has been proved", a concession or admission being something that avoids proof rather than constitutes proof. 15 As was noted in Condon (above), s.588FGA(4) makes it plain that, if the Commissioner chooses that particular avenue as the means of pursuing the indemnity conferred by s.588FGA(2), the Commissioner must make the claim for the s.588FGA(4) order "in" the proceedings in which the liquidator proceeds against the Commissioner under s.588FF for an order for the payment of money. It was this circumstance that led to the conclusions in Condon that an interlocutory process rather than an originating process should be used by the Commissioner in mounting the s.588FGA(4) claim and that that claim was not a "cross-claim" as defined by Part 1 rule 8. But in light of the matters now in issue, use in s.588FGA(4) of the words "in the proceedings in which it made" can be seen to have an added significance. If an order in favour of B and against C is to be made "in" proceedings in which an order has been made in favour of A and against B, it must, I think, follow that all of A, B and C are intended to be parties to those proceedings. It cannot be contemplated that an order will be made against C without C's having become a party to the proceedings "in" which the order is to be made. There is thus, in my view, an implicit statutory direction that directors against whom the Commissioner proceeds under s.588FGA(4) be accepted as being parties to the proceedings brought by the liquidator against the Commissioner. The provision of the Supreme Court (Corporations) Rules that makes an interlocutory process the appropriate vehicle for pursuit of the Commissioner's claim against directors introduces an element of procedural incongruity. But that must not stand in the way of full recognition and effectuation of the statutory intention to which I have referred. 16 For reasons I have stated, a decision by the Commissioner to pursue the s.588FGA(4) route (as distinct from any other) in seeking to enforce the s.588FGA(2) indemnity carries within it a decision that the relevant directors should be afforded the position of third parties in the proceedings brought by the liquidator against the Commissioner. As a corollary, it must, in my opinion, be intended that the directors in question should be able to defend the liquidator's claim against the Commissioner, that being a generally accepted incident of third party status: see Helicopter Sales Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1 per Barwick CJ at p.5 and Mason J at p.15. 17 In Crosbie (as liquidator of Trollope Silverwood & Beck Pty Ltd) v Commissioner of Taxation (2003) 21 ACLC 1659, Finkelstein J took the view that, in a case such as the present, the directors should be able to take part fully in the proceedings between the liquidator and the Commissioner, particularly where the Commissioner will not take steps to contest liability. His Honour saw that as a requirement of justice and said that a grant of leave for the directors to defend the liquidator's claim against the Commissioner would be made accordingly. There was no discussion of the basis on which the need for leave arose. Subsequently, in Deane-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd) v Commissioner of Taxation (above), Austin J made important observations on these matters. His Honour saw it as arguable that s.588FGA impliedly excludes any right of directors to be heard before a recovery order is made against the Commissioner. He drew an analogy with a contractual guarantor who, in the absence of some contrary specification in the contract, is not entitled to notice of recovery proceedings by the creditor against the principal debtor. He then questioned the appropriateness of the analogy (at [45]): "On the other hand, the directors are exposed to liability, not under a true contractual guarantee but by virtue of a statutory indemnity, expressed in unqualified terms save only for the making of a recovery order against the Commissioner, and without recourse to the general law of guarantees. Their direct statutory liability is of a kind that would normally provide a basis for application of the rules of natural justice." 18 Austin J also referred to the prejudice that directors may suffer (at [40]): "The directors of a company in liquidation may be prejudiced by an order for recovery of certain tax payments made against the Commissioner under s 588FF, because the making of the order imposes on them an obligation to indemnify the Commissioner under s 588FGA. Their position is governed by the observations of Dixon CJ and Webb J in Commissioner of Police v Tanos , at 395, where their Honours referred to the "deep-rooted principle of the law that before anyone can be punished or prejudiced in his person or property by any judicial or quasi-judicial proceedings he must be afforded an adequate opportunity of being heard". Prima facie , therefore, the directors are entitled to be notified and given an opportunity to be heard before any recovery order is made against the Commissioner." 19 Austin J also said: " Crosbie is authority for the proposition that if the directors apply for leave to be joined to the recovery proceeding, s 588FGA gives them an interest sufficient to warrant the making of an order in their favour. It leaves open the question whether, if the directors do not seek any such relief, the court should ensure that they have been duly notified before making any orders under s 588FF. This question arises whenever the preference recovery action is against the Commissioner in respect of any of the tax liabilities mentioned in s 588FGA(1), regardless of whether the orders are to be made by consent, or upon an admission of insolvency, or after a full contest.

It is unnecessary for me to decide that question here. It will arise only if the court comes to make orders under s 588FF, and only if, at that stage, there is no evidence that the directors have been duly notified of the circumstances."

Deane-Willcocks , I should point out, was not a case in which the Commissioner had resorted to s.588FGA(4). Austin J's observations on matters of procedure appear to be directed mainly to the situation where a liquidator's claim against the Commissioner and the Commissioner's claim against directors are pursued in separate proceedings. 20 I should refer also to the decision of Hamilton J in Wily (as liquidator of Boutique Resorts Management Pty Ltd) v Commissioner of Taxation [2002] NSWSC 909 where his Honour dealt with a submission that s.588FGA only takes effect if and when the court makes an order against the Commissioner and no cause of action arises until the order is made. Hamilton J accepted that submission (at [32]) but went on to say that it was not necessary for the liquidator's cause of action against the Commissioner to be complete at the time when the Commissioner institutes what his Honour was content to describe as the "cross claim for indemnity" pursuant to s.588FGA(4). This reasoning explains the correctness of the commonly encountered procedure (adopted in this case and many others and never questioned: see Condon at [32]) under which the Commissioner's claim against directors under s.588FGA(4) is initiated while the proceedings in which the liquidator claims against the Commissioner are unresolved. 21 The case before me is one in which the directors seek to be assured of their right to participate fully in the proceedings brought be the liquidators against the Commissioner. By conscious choice, the Commissioner has sought relief against the directors in the proceedings in which the claim by the liquidators is pursued against the Commissioner. The Commissioner has deliberately declined to follow any alternative course that would have seen those proceedings confined to the controversy between the liquidators and the Commissioner, with the question of recourse by the Commissioner against the directors under s.588FGA left to be pursued in some separate proceeding. The particular course the Commissioner has chosen is one expressly made available by the statute. The liquidators, by whom the proceedings were commenced, are therefore bound to deal with those proceedings in the modified form into which they have been put by the Commissioner. Part and parcel of that, it seems to me, is a requirement that the status of the directors as third parties introduced by the Commissioner into in the liquidators' proceedings, being a status created by s.588FGA(4) itself, be fully secured. The dangers of trying to create some partial participation by third parties is illustrated by Coote v Richards [2001] 2 QdR 20. 22 Consistently with this, the directors, as statutory third parties to the proceedings, must be afforded the right and ability to contest all matters relevant to the question of liability between the liquidators and the Commissioner, including the matter of insolvency. I agree with Finkelstein J that, in a case of this kind, basic principles of justice so require. A likely consequence is that the liquidators will be put to proof of the matters in paragraph 9 of the statement of claim despite the Commissioner's admission. But it is to be borne firmly in mind that the Commissioner, as well as making the admission, has taken the particular opportunity made available by s.588FGA(4) to recast the liquidators' proceedings by inserting as parties the persons who not only have a real interest in contesting the insolvency question but also are likely to have the factual wherewithal to do so. That those persons should be able to participate fully in that contest is, to me, obvious. 23 I return to the questions set out at paragraph [10] above and take them in reverse order. It follows from what I have just said that the answer to question 3 is "no". As for questions 1 and 2, the specification in s.588FGA(4) that the Commissioner's claim against the directors be brought "in" the proceedings initiated by the liquidators and the implicit message that the directors are accordingly to be seen as third parties in those proceedings must mean that formal leave for the directors to defend the liquidators' claims against the Commissioner is not required and that there is no need for the formal joinder of the directors as defendants; however, as there is a procedural gap so far as the applicability of cross-claim rules is concerned, the clear requirement that the directors be assured of their ability to participate fully should cause the court to put it beyond doubt by appropriate directions. Such a course makes it unnecessary to decide whether separate determination of the proceedings as between the liquidators and the Commissioner will have adverse effects for the directors because of s.588E(8) (see paragraph [14] above). 24 Rule 1.8 of the Supreme Court (Corporations) Rules 1999 is as follows: " Court's power to give directions The Court may give directions in relation to the practice and procedure to be followed in a proceeding if it is satisfied, in the circumstances of the proceeding, that: (a) the provisions of the Corporations Act, the ASIC Act, or the rules of this Court do not adequately provide for the practice and procedure to be followed in the proceeding, or (b) a difficulty arises, or doubt exists, in relation to the practice and procedure to be followed in the proceeding."

The present case is, in my opinion, within both paragraph (a) and paragraph (b) of this rule. 25 Rule 1.8 will support directions necessary to achieve the objectives I have outlined. The general approach, it seems to me, should be to import, with appropriate modifications, provisions of Part 6 of the Supreme Court Rules dealing with cross-claims. The general position sought in the interlocutory processes of the two directors who sought specific directions should be achieved. It is desirable that there be discussion among the parties' representatives as to the precise form of the directions under rule 1.8 of the Supreme Court (Corporations) Rules. I outline the following as no more than a draft for discussion and refinement: "1. For the purposes of this Direction and Directions 2 to 5: 'Commissioner's claim' means a claim by the defendant under the interlocutory process filed by the defendant on 15 July 2004; 'plaintiffs' claims' means the claims made by the plaintiffs in the proceedings; 'proceedings' means the proceedings initiated by the originating process filed on 4 May 2004 insofar as those proceedings relate to Reynolds Wines Limited; and 'respondent' means, in relation to a Commissioner's claim, the person against whom that Commissioner's claim is brought by means of the interlocutory process filed by the defendant on 15 July 2004. 2. Part 6 of the Supreme Court Rules shall, subject to Directions 3 to 6, apply to and in relation to each Commissioner's claim as if: (a) the Commissioner's claim were, for the purposes of Part 6, a cross-claim in the proceedings, being a cross-claim for indemnity in respect of the plaintiffs' claims; (b) the defendant were the cross-claimant under the cross-claim; and (c) the respondent to the Commissioner's claim were the cross-defendant to the cross-claim. 3. Part 6 rules 2, 3, 5, 10, 11, 12 and 13 shall not apply. 4. The respondent to a Commissioner's claim shall be taken to have leave under Part 6 rule 4: (a) to appear and take part in the hearing of the plaintiffs' claims; and (b) to defend the plaintiffs' claims. 5. The respondent to a Commissioner's claim may raise as against the defendant any matter in response to the Commissioner's claim whether or not the matter may be raised against the plaintiffs in defending the plaintiffs' claims. 6. There shall be taken to have been a direction under Part 6 rule 4(d) that the defendant and the respondent to the Commissioner's claim shall be bound as between themselves by a judgment or decision on the plaintiffs' claims and shall be treated as a party to the proceedings on any question of costs." 26 I direct that short minutes giving effect to these reasons be brought in within 21 days. The legal representatives of the fourth director (who did not file an interlocutory process seeking leave to participate in the liquidators' proceedings) should be given an opportunity to participate in the formulation of the short minutes. **********

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Commissioner Corporations Act 2001(Cth)

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