Harris & Anor v Commissioner of Taxation and Ors

PROCEDURE - SUPREME COURT PROCEDURE - QUEENSLAND - PROCEDURE UNDER RULES OF COURT - JUDGMENTS AND ORDERS - where proceedings on foot pursuant to s 588FF Corporations Act seeking orders that Commissioner of Taxation repay moneys alleged to constitute unfair preferences - where liquidator and Commissioner of Taxation consented to judgment being made against the Commissioner for the amount sought - where consent order was made by Deputy Registrar - where Uniform Civil Procedure Rules expressly provides for when Powers of Court may be exercised by registrar- where s588FF not expressed in Schedule 1A of UCPR as a power that may be exercised by a registrar - whether Deputy Registrar had power to make order under s588FF of Corporations Act

CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - where requirement in s588FF of Corporations Act that Court must be "satisfied" that transaction was voidable as a basis for making an order - where liquidator and Commissioner of Taxation consented to judgment being made against the Commissioner and accordingly no facts put before the Court to establish that transaction was voidable - whether proof of facts necessary for a Court to be "satisfied" that transaction voidable - whether consent order is sufficient to found order under s588FF

PROCEDURE - SUPREME COURT PROCEDURE - QUEENSLAND - PROCEDURE UNDER RULES OF COURT - PARTIES - THIRD PARTY AND SIMILAR PROCEEDINGS - where third party notice filed against directors of company but service not affected according to UCPR - where Consent Judgment subsequently entered into by plaintiff liquidator and Commissioner of Taxation - where interlocutory application then filed under s588FGA seeking an indemnity against third party directors - where third parties denied the right to make submissions at the time the consent order was made - whether third parties deprived of procedural right to appear on the consent judgment application - whether consent judgment should be set aside

Corporations Act 2001 (Cth), s588FF, s588FGA, s588FGB

Corporations (Ancillary Provisions) Act 2001 (Cth), s24

Supreme Court of Queensland Act 1991 (Qld), s118

Uniform Civil Procedure Rules 1999 (Qld), schedule 1A, schedule 1B, r195, r196, r203, r388, r452, r666

Cadima Express v Deputy Commissioner of Taxation [1999] NSWSC 1143; (1999) 33 ACSR 527; cited

Condon v Commissioner of Taxation [2004] NSWSC 481; [2004] 185 FLR 27; considered

Cooper and Anor (as liquidators of Wanted World Wide (Australia) Ltd (in liq) v Commissioner of Taxation (2004) 210 ALR 635; followed

Crosbie v Commissioner of Taxation (2003) 21 ACLC 1; considered

Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd)(in liq) and Anor v Commissioner of Taxation (No 2) and Ors (2004) 49 ASCR 325; followed

Hall and Anor (as liquidators of Reynolds Wines Ltd) v Commissioner of Taxation [2004] NSWSC 985; (2004) 51 ACSR 173; considered

Hall v Commissioner of Taxation [2004] NSWSC 985; followed

SJP Formwork (Aust) Pty Ltd (in liq) v Deputy Commissioner of Taxation (2000) 34 ASCR 604; cited

Young v Commissioner of Taxation [2006] FCA 90; followed

V G Brennan for first and second third parties/respondents

Martinez Quadrio for first and second third parties/respondents

[1] MACKENZIE J: On 12 May 2005 the liquidators of Denlizco Trading Company Pty Ltd filed a claim in which they sought an order pursuant to s 588FF of the Corporations Act 2001 that the Commissioner of Taxation pay the sum of $84,000 alleged to constitute unfair preferences. It was alleged that each payment was an insolvent transaction of the company and therefore voidable.

[2] On 30 June 2005 a third party notice was filed against Mr Weeks and Mr Beard who, according to ASIC records exhibited to an affidavit of Ms Delahunt, were directors during the relevant period. This was not served until 10 February 2006 in the case of the first third party, Mr Weeks and 13 February 2006 in the case of the second third party, Mr Beard. This delay was in contravention of UCPR r 195(1)(b). Had service been effected the third party would have become a party (UCPR r 196), with the right to appear at the trial and take part in it as the Court directs (UCPR r 203(i)). Unless the Court orders otherwise, the issues between the defendant and the third party must be tried concurrently with the issues between the plaintiff and defendant (UCPR r 203(2). I will return to this later.

[3] In the meantime, on 11 July 2005 Consent to Judgment in sum of $85,307 which comprised the $84,000 and a sum for costs on the basis of a consent signed by solicitors for the liquidators and the Commissioner resulted in an order being made by a Deputy Registrar. The next relevant event was that on 15 December 2005 a summary application was filed, in the liquidator's proceedings, under s 588FGA(2) of the Corporations Act seeking a declaration and order that the first and second third parties were liable to indemnify the Commissioner in respect of loss and damage suffered by the Commissioner in having to repay the sum awarded against it in the consent judgment. Judgment in that sum is sought against them.

[4] Both third parties have filed affidavits in which they assert a belief, based on what they had been told by a person who was the company accountant at relevant times, that the company was able to make such payments, that it was at all times solvent and would remain solvent even if the payments were made. If those beliefs were to be made out each of the third parties would be entitled to the defence in s 588FGB(3) or (4) of the Corporations Act.

[5] Non-service on the third parties of the third party notice prior to February 2006 was surprising since at all material times, there was a policy statement by the Commissioner in the public arena in the following terms:

22.4.11 For the Commissioner to consent to judgment, it would be necessary for evidence to be presented to the Court that would be sufficient for the liquidator to obtain summary judgment, assuming there was no appearance of the Commissioner. Notice of the proposed consent order should be given to the directors before the order is made to afford them the opportunity to raise any objection. This is necessary in order for the Commissioner not to compromise the ability to enforce the indemnity under section 588FGA.

[6] When the Commissioner's representative was asked why the policy had not been followed, I was told in effect that it was because of the dilemma involved in, on the one hand, following the policy with the consequences of delay and increase of costs by way of interest charges, combined with pressure from liquidators to resolve issues between them and the Commissioner promptly, and, on the other hand, not following the policy with the consequence that directors had no opportunity to agitate, at an early stage, the issue of whether the payment was an undue preference. If other developments have overtaken it, there seems to be good reason to recast it to reflect the currently accepted approach to matters of this kind.

[7] Although the liquidators had no ongoing interest in the matter once they had obtained judgment, an issue was raised about the power of a registrar to make an order under s 588FF of the Corporations Act. A direction was given that the liquidators be afforded the opportunity of making written submissions on the point. Relevantly, on 20 March 2006, the liquidators advised that they opposed the setting aside of the order and relied on the submissions made on behalf of the Commissioner.

[8] The framework for considering that issue is that the State of Queensland referred certain powers to the Commonwealth by the Corporations (Commonwealth Powers) Act 2001 as a result of which the Corporations Act 2001 applies in Queensland. Section 118 of the Supreme Court of Queensland Act 1991 empowers the Governor-in-Council to make Rules of Court under the Act for:

(a) the practices and procedures of the Supreme Court or their registries or another matter mentioned in schedule 1 or...

(d) any law giving jurisdiction to the Supreme Court, including

a law of the Commonwealth.

[9] There is a list of subject matters for which rules may be made in schedule 1 of the Act. In addition to a general power in Part 1 relating to jurisdiction of the courts including civil, criminal and any appellate jurisdiction, paragraph 22 of Schedule 1 makes provision for the making of rules with respect to the following:

"Any law including a Commonwealth law, under which the Supreme Court exercises jurisdiction in relation to corporations or similar entities".

[10] Also, s 24 of the Corporations (Ancillary Provisions) Act 2001 makes the following provision:

"Rules of the Supreme Court

(1) Rules of court may be made in accordance with the Supreme Court of Queensland Act 1991, part 9-

(a) with respect to proceedings, and the practice and procedure, or the Supreme Court under the Corporations legislations; and

(b) with respect to any matter or thing that is-

(i) required or permitted by the Corporations legislation to be prescribed by rules within the meaning of the Corporations legislation; or

(ii) necessary or convenient to be prescribed by those rules for carrying out or giving effect to the Corporations legislation...".

[11] Rule 995 provides that the rules in schedule 1A of the UCPR apply to proceedings in the Supreme Court under the Corporations Act. These are the Corporations Proceedings Rules ("CPR"). Rule 1.3(1) in schedule 1A provides that unless the court otherwise orders, the rules in 1A apply to a proceeding in the court under the Corporations Act. Rule 1.3(2) provides as follows:

"The other rules of the court apply, so far as they are relevant and not inconsistent with these rules, to a proceeding in the court under the Corporations Act..."

[12] Rule 16.1 provides as follows:

(1) Unless the court otherwise orders, a registrar may exercise a power of the court under a provision of the Corporations Act or the rules mentioned in schedule 1B.

(2) The Chief Justice may direct the registrar either generally or in a particular matter to hear and decide an application made under the Corporations Act or the ASIC Act.

(3) A decision, direction or act of a registrar made, given or done under this part, may be reviewed by the court....".

[13] Schedule 1B UCPR lists a large number of sections of the Corporations Act and the CPR as powers of the Court that may be exercised by a registrar. The significant thing for the purposes of the present application is that schedule 1B does not include s 588FF of the Corporations Act.

[14] UCPR r 452 which authorises a registrar to constitute the court to hear and determine certain opposed applications of a type defined in UCPR 452, including applications prescribed by Practice Direction, is of no relevance. UCPR 666 provides for consent judgments to be given by a registrar if the parties consent in writing and the registrar considers it appropriate.

[15] The issue raised on behalf of the first and second third parties is a short one. It is whether the Deputy Registrar had the power to make a consent order under s 588FF by virtue of r 666 UCPR, notwithstanding that s 588FF is not designated as one of the sections in respect of which the registrar may exercise a power of the court. In short, does the provision in r 1.3(2) CPR operate to permit a Deputy Registrar to make an order in Corporations Act matters not listed in schedule 1B merely because the order is a consent order. I should also add that there is no evidence that any direction under r 16.1(2) has been given by the Chief Justice to the registrar in connection with this matter or generally.

[16] The better view is that a Deputy Registrar has jurisdiction. Firstly, inclusion of the "consistency" provision in r 1.3(2) of the CPR themselves invites consideration of whether it is inconsistent with the CPR for a Registrar to exercise the general jurisdiction under UCPR, of which the CPR are a part, to give consent judgments. As they are both part of the UCPR, they should be construed in harmony as far as possible; r 666 should be construed in harmony with the CPR provided it is relevant and not inconsistent with them.

[17] Secondly, r 16.1(1) CPR does not exclusively prescribe all of the matters in which a Registrar may exercise the power of the court under the Corporations Act. It envisages that particular provisions of the Corporations Act or Rules will be mentioned in schedule 1B. However r 16.1(2) permits a general or specific enlargement of a Registrar's jurisdiction merely by direction of the Chief Justice. Co-existence of a specific authority in the UCPR for a Registrar to make consent orders with that sort of authorisation process is not incongruous.

[18] Thirdly UCPR r 666 was in existence at the time when the CPR were made. If it had been the intention to exclude the operation of r 666 it would not have been beyond the ingenuity of a draftsman to do so even in rules that are, according to UCPR r 995, intended to apply in harmony with similar rules in other Australian Courts. While the intention is that the CPR be substantially harmonious with the rules of other courts, there is no inhibition on local variations to conform with practices of individual courts.

[19] Having regard to these factors the better conclusion is that r 666 is not inconsistent with the CPR. The Deputy Registrar has jurisdiction to make an order to which all relevant parties consent. As will be seen later, a fundamental question is whether all necessary parties did consent.

[20] One other matter to which attention was drawn, although it was conceded that it was easily corrected, was that while the originating claim and the consent to judgment refer to s 588FF of the Corporations Act, the order on file refers to s 588F. It is difficult to imagine a clearer case of clerical error which may be corrected under r 388 UCPR.

[21] The next issue is whether an order pursuant to s 588FF may be based on a consent order. This invokes the controversy whether the requirement in s 588FF that a court be "satisfied" that a transaction was voidable as a basis for making an order of the kind made in this case required proof of facts that will establish that conclusion. That was the view expressed by Finkelstein J in Crosbie v Commissioner of Taxation (2003) 21 ACLC 1,659. Crosbie was unlike the present matter because the Commissioner did not consent to judgment but indicated that he would not contest the plaintiff's claim. Not surprisingly, Finkelstein J held that proof that the transaction was voidable was necessary. He also gave leave to the directors to defend the liquidator's action for the purpose of challenging the liquidator's assertion that the company was insolvent. He said in that regard:

"6 Even if proceedings have not been taken against the third parties, the interests of justice would demand that they be given permission to intervene in the proceeding between the plaintiffs and the defendant especially where, as in this case, the defendant will not take steps to protect its possible liability to the plaintiffs..."

[22] In expressing the view that evidence was necessary, Finkelstein J declined to follow two New South Wales cases, Cadima Express v Deputy Commissioner of Taxation [1999] NSWSC 1143; (1999) 33 ACSR 527 (Austin J) and SJP Formwork (Aust) Pty Ltd (in liq) v Deputy Commissioner of Taxation (2000) 34 ASCR 604 (Santow J) by whom it had been held that it was not necessary to provide such proof in a case where the order was made by consent.

[23] The weight of subsequent authority is to the contrary. It consists of decisions that expressly dissent from Finkelstein J's basic propositions that the proof of facts was necessary because a court could not be "satisfied" that the transaction was a voidable transaction unless it had before it facts which establish that conclusion, and that the "satisfaction" was akin to a jurisdictional fact. Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd (in liq) and Anor v Commissioner of Taxation (No 2) (2004) 49 ASCR 325, (Austin J) Cooper and Anor(as liquidators of Wanted World Wide (Australia) Limited)(in liq) v Commissioner of Taxation (2004) 210 ALR 635, (Lander J), Hall v Commissioner of Taxation [2004] NSWSC 985, (Barrett J) and Young v Commissioner of Taxation [2006] FCA 90, (Tamberlin J) all accept that a consent order is sufficient to found a judgment under s 588FF. It was conceded by counsel for the third parties that, based on the present state of authorities, the better view is that a consent judgment or admissions are sufficient to "satisfy" a court that an order pursuant to s 588FF is appropriate. Therefore for present purposes nothing turns on that issue.

[24] The next matters raised concern the proper procedure to be followed upon an application for an order under s 588FF, the effect of failure to give notice to the first and second third parties of the application to obtain a consent order, and whether the third party procedure or an interlocutory application in the original proceedings is the correct manner of proceeding. It was submitted on behalf of the respondent that interlocutory proceedings are the proper method of proceeding, by reference to r 2.2(1) and (2) CPR. It is conceded by the applicant that filing the third party notice and statement of claim and serving it much later, at the same time as the interlocutory application, was capable of causing confusion as to whether the first and second third parties were required to respond in a way appropriate to the third party notice or the interlocutory application. That is undoubtedly true. However the question is one of some complexity.

[25] As Barrett J said in Condon v Commissioner of Taxation [2004] NSWSC 481; [2004] 185 FLR 27, at the time he delivered judgment, "even within New South Wales and leaving to one side procedural differences that may arise in other jurisdictions" there was not necessarily any settled practice. At 29 and 32, he referred to ways available to vindicate the right to indemnity under s 588 FGA. In the context of the Supreme Court Act 1970 (NSW) he held that the appropriate procedure for initiating the Commissioner's application under s 588FGA(4) was identified by r 2.2(1)(b) of the New South Wales equivalent of the CPR. An interlocutory process in the proceedings in which the liquidator sought the s 588FF(1) order against the Commissioner was the appropriate manner of proceeding.

[26] The decision in that regard depended upon consideration of s 78 of the Supreme Court Act 1970 (NSW), since it was argued that the procedure adopted was, in substance, a cross-claim. The rules relating to counterclaims under the UCPR are expressed somewhat differently, and in any event, that point was not argued before me. There are two concurrent proceedings on foot in the present matter, the interlocutory application and the third party proceedings. In view of the fact that both forms of procedure have been commenced, it is not critical to discuss the issue further in view of the orders I intend to make. In Hall and Anor (as liquidators of Reynolds Wines Ltd) v Commissioner of Taxation [2004] NSWSC 985; (2004) 51 ACSR 173, Barrett J noted that the proceedings had been commenced by interlocutory proceedings in accordance with Condon and went on to discuss the other main issue raised before me, the fact that the third parties had been denied the right to make any submissions at the time the consent order was made.

[27] As to this, he came to the conclusion that there was an implicit statutory direction that directors against whom the Commissioner proceeds under s 588FGA(4) be accepted as parties to the proceedings brought by the liquidator against the Commissioner. He went on to say that a decision by the Commissioner to pursue a remedy pursuant to s 588FGA(4) in seeking to enforce the s 588FGA(2) indemnity carries with 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. He said that, as a corollary, it must 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. He referred to Crosbie and Dean-Willcocks where there had been discussion for the rights of directors.

[28] In Crosbie, Finklestein J referred to the development of the third party procedure and the notion that third parties should be given the right to appear at trial. His position on the issue is reflected in the quotation from his reasons in [21] above. In Dean-Willcocks, Austin J referred to the tension between the presumed legislative purpose which impliedly excluded any right on the part of the directors to be heard before a recovery order was made against the Commissioner, and the fact that directors were exposed to liability by virtue of a statutory indemnity dependent only on the making of a recovery order against the Commissioner. He observed that that direct statutory liability was of a kind that would normally provide a basis for application of the rules of natural justice.

[29] Apart from the propriety of adopting a coherent approach by applying decisions in other jurisdictions under national legislation, there is no authority to which my attention was drawn or which researches revealed suggesting that the thrust of the authorities is wrong. (See also CCH Australian Corporations Commentary 166 - 430).

[30] The third parties rely on the remarks of Barrett J in Hall in support of the proposition that the consent order deprived them of a procedural right, either as named third parties or statutory third parties, to appear on the consent judgment application. It was submitted that this was an irregularity which requires, in the interest of justice, the consent judgment to be set aside.

[31] On the evidence before me and, in particular, having regard to the affidavits of each of the third parties, there is no direct evidence that the company was in fact solvent at the time the payments in question were made. Neither of the third parties asserts this in their affidavits. In paragraph 4 of his affidavit, Mr Weeks says that he has a defence to the third party statement of claim on the basis that he had reasonable grounds to expect and did expect that the company was solvent at each time that the relevant payments were made and that the company would remain solvent even if it made those payments. Paragraph 5 says that he was informed by the company accountant that when each of the payments were made, they should be paid in the normal course of business and that there was money available for such payments. He believed that the company at all times was solvent and would remain solvent even if those payments were made.

[32] Mr Beard in paragraph 4 of his affidavit made an identical statement of belief to that in paragraph 4 of Mr Weeks' affidavit. In paragraph 5 of his affidavit he says also that he was informed by the company accountant that the company was able to make the relevant payments and that the company was at all times solvent and would remain solvent even if those payments were made.

[33] Each of those paragraphs focus on the belief of the deponent, which is relevant to the defences in s 588FGB. They are relevantly as follows:

"(3) It is a defence if it is proved that, at the payment time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it made the payment.

(4) Without limiting the generality of subsection (3), it is a defence if it is proved that, at the payment time, the person:

(a) had reasonable grounds to believe and did believe:

(i) that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and

(ii) that the other person was fulfilling that responsibility; and

(b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it made the payment."

If it turns out that the two third parties do not have any basis for contesting that the payments were in fact undue preferences or insolvent transactions, the issue of whether they were denied procedural fairness at the time the "consent order" was made will be devoid of practical effect. The order will be again made, even if they are afforded the right to appear, by a judge if it could not be made by a registrar because all necessary parties had not consented. However, their affidavits disclose facts which, if established in a contested hearing, would afford them a defence to the Commissioner's proceedings. That option is still open to them if an order is duly made.

[34] In accordance with what has been said above, the following are the orders:

1. The order of the Deputy Registrar made on 11 July 2005 is set aside.

2. The application filed on 12 May 2005 is adjourned to a date to be fixed.

3. The first respondent / first third party / and the second respondent / second third party file and serve on the plaintiffs and the defendant, all affidavits upon which they wish to rely in opposition to the plaintiff's application filed on 12 May 2005 within 21 days.

4. The third party proceedings filed 30 June 2005 between the applicant/defendant and the first and second third parties be adjourned to a date to be fixed.

5. The interlocutory application filed on 15 December 2005, be adjourned to a date to be fixed.

[35] It is, of course, not necessary for subsequent steps in the matter to be heard by me. It is the intention of the orders that, initially, the liquidators' application be heard in the ordinary course on the Applications List and any subsequent proceedings be determined in the ordinary course of the Court's business.