Jahani (liquidator) v Commissioner of Taxation

Federal Court of Australia|2020-11-12|Before: Stewart J

Pursuant to rule 30.11 of the Federal Court Rules 2011 (Cth), this proceeding be consolidated with proceeding NSD577/2020.
For the purposes of the consolidation: (a) the defendant in this proceeding be referred to hereafter in proceeding NSD577/2020 as the twenty-ninth defendant; (b) the pleadings in this proceeding stand as the pleadings between the parties to this proceeding in proceeding NSD577/2020; (c) the evidence filed by the parties in this proceeding be treated as evidence filed by them in proceeding NSD577/2020; (d) the parties to this proceeding be subject to the orders made in proceeding NSD577/2020 on 22 October 2020.
The defendant pay the costs of the plaintiffs' interlocutory application filed on 23 October 2020. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

The present proceeding 1 The plaintiffs are the liquidators of four related companies, namely Delta Coal Mining Pty Ltd, Delta Mining Pty Ltd, SBD Services Pty Ltd and Delta SBD Ltd. In November 2018, the plaintiffs commenced the present proceeding against the Commissioner of Taxation. The amended statement of claim identifies approximately $9 million of payments to the Commissioner in the six month period before the relation back day, which is pleaded to be 31 May 2017 for all the companies. 2 It is pleaded that the payments are insolvent transactions within the meaning of s 588FC of the Corporations Act 2001 (Cth) and that they are hence voidable transactions pursuant to s 588FE(2). It is accordingly a necessary, and pleaded, element of the claims that each company was insolvent when the payments were made, namely in the period 1 December 2016 until the relation back day. 3 In respect of each company, in his defence the Commissioner has pleaded that he does not admit the allegations of insolvency. Thus, whether the relevant company was insolvent at the time of each payment is in issue in the proceeding. 4 The last pleading, being the plaintiffs' reply, was filed in March 2019. Thereafter, there were orders for a mediation which was apparently unsuccessful. Discovery then took place later in 2019. The plaintiffs' evidence was served in May 2020. That evidence includes a 4,000 page report by one of the liquidators, Mr Jahani, on the solvency of the companies. After some extensions, the Commissioner served his evidence in August 2020. Reply evidence has not yet been served. The matter is close to being ready for trial. 5 The plaintiffs by interlocutory application now seek orders that may be summarised as follows: (1) pursuant to r 30.11 of the Federal Court Rules 2011 (Cth), that this proceeding be consolidated with proceeding NSD577/2020 (which is a related proceeding I will come to describe presently); (2) alternatively, an order that this proceeding be case managed together with the other proceeding and consequential orders; (3) alternatively to the order for consolidation, an order pursuant to s 37P(2) and s 54A of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and Div 28.6 of the Rules that a referee be appointed to inquire into and report on the questions of whether each of the companies was insolvent during the period 1 December 2016 to 31 May 2017 inclusive (the insolvency questions), together with orders for the identification and appointment of the referee and for the conduct of the reference. 6 The reason why the third order, being the referral of the insolvency questions to a referee, is sought only as an alternative to the consolidation order is that orders of referral of the insolvency questions to a referee have already been made in the other proceeding. Thus, if the two proceedings are consolidated then those referral orders will in any event apply to the defendant in the present proceeding. 7 Because of the inter-relatedness of the orders that are sought with the other proceeding, it is necessary to identify some material aspects of it.

The mothership proceeding 8 On 27 May 2020, in Jahani (liquidator) v Alfabs Mining Equipment Pty Ltd, in the matter of Delta Coal Mining Pty Ltd (in liq) [2020] FCA 752 I gave leave to the liquidators of the four companies (i.e. the same plaintiffs) to commence a single proceeding against 28 defendants. In the proceeding (which I will hereafter refer to as the mothership proceeding), the plaintiffs seek orders for repayment of identified sums of money from each of the defendants under s 588FF of the Act as being voidable transactions within the meaning of s 588FE(2) because they are insolvent transactions within the meaning of s 588FC. 9 In the reasons for the joinder of all the defendants in one proceeding, I observed that there is a reasonable prospect that a common issue to all the claims is likely to be the insolvency of the companies. That arises because a necessary element of establishing that a transaction is an insolvent transaction is that it was entered into at a time when the company is insolvent (s 588FC(a)). There is an alternative possibility, namely that the company becomes insolvent because of entering into the transaction (s 588FC(b)), but that alternative is not relied on. I observed that if there were proceedings against each of the defendants separately and the issue of insolvency of the companies was contested, the consideration of that issue alone would require the allocation of significant judicial resources. Also, it would lead to the risk of inconsistent findings in relation to the same ultimate subject matter. I observed as follows (at [19]): It would be a poor day for the administration of justice if 28 separate cases each had to deal with the same factual question or questions, and potentially arrive at conflicting conclusions. Not only would that be an enormous waste of judicial resources, but it would also bring the system into disrepute. 10 As it happens, all the defendants in the mothership proceeding disputed the material allegations in the statement of claim with regard to the insolvency of the companies. Those were that each company was insolvent in the period from at least 1 December 2016 to the relation back day which was, in each case, 31 May 2017. Each of the payments in respect of which repayment is sought is said to have been made in that six month period, as is required by s 588FE(2)(b)(i). 11 The claims against many of the defendants have subsequently been settled. There are currently still 14 defendants to the mothership proceeding. The claims against these remaining defendants amount to approximately $5 million. 12 In the face of little opposition, in a case management hearing on 22 October 2020 I made orders to the following effect: (1) by 6 November 2020, the parties are to jointly provide by email to my Associate the name of a referee to inquire into and report on the questions of whether each of the four companies was insolvent during the period 1 December 2016 to 31 May 2017 inclusive and, if so, when during that period each company was insolvent; (2) if the parties cannot agree on the name of the referee by 6 November 2020, by 13 November 2020 the parties are to jointly provide by email to my Associate as short a list as possible of the names of persons who the parties consider appropriate to be appointed as a referee, and such appointment will be determined by me in Chambers; (3) the referral of the insolvency questions to the referee with the reference to commence on 25 November 2020 and with various provisions for the conduct of the reference; (4) without affecting the powers of the Court as to costs, that the parties are, in the first instance, to be liable to the referee for his or her fees in the following proportions, namely the plaintiffs as to 50% and the other parties as to the other 50%, but each in proportion to the claim against it. 13 The dates in those orders were chosen so as to enable the present application to be decided before material steps had been taken in the reference to a referee in the mothership proceeding. That is so that in the event that I decide that the reference should not also apply to the present proceeding - whether by way of consolidation or specific orders for the reference - it will not be too late to revisit, and if appropriate vacate, the orders in the mothership proceeding.

Submissions with regard to referral to a referee 14 In his submissions, the Commissioner says nothing about consolidation of the two proceedings, but he makes a number of submissions against the referral of the insolvency questions to a referee. He also submits that in the event that there is a reference to a referee, the referee should not be an insolvency practitioner (as proposed by the plaintiffs) but rather a senior lawyer such as a retired judge. 15 The Commissioner makes the alternative submission that in the event that the insolvency questions are not to be decided in a conventional trial with the parties presenting competing expert evidence, then the Court should appoint a single expert to give evidence on insolvency. 16 I hope that I do the Commissioner's submissions no injustice by summarising them as follows. 17 The first set of submissions concerns the relatively advanced state of the present proceeding. I have identified the relevant elements of that above. The Commissioner submits that if the case proceeds "in the usual way" and the insolvency questions are determined by the Court, the only expert witness from whom the Court will receive evidence will be the liquidator. That is because the Commissioner has elected not to adduce expert evidence on these questions, and is content to approach the insolvency questions at trial on the basis of cross-examination and the tender of documents. If, however, a reference is made to a referee then the proceeding will be delayed and an additional step, namely a hearing on the question of whether the referee's report ought to be adopted, will be added. 18 The Commissioner also submits that because his defence raises other issues (under ss 588FG and 553C of the Act) which will require the plaintiffs to prove aspects of the companies' failing circumstances which they say were actually known to the Commissioner at the time the impugned payments were received, the reference will not avoid the need for the Court to consider that evidence for the purpose of determining those matters. Thus, the Commissioner submits that a reference will not, in the circumstances of this case, further the objective of the overarching purpose, namely the just resolution of the dispute as quickly, inexpensively and efficiently as possible: s 37M(1) of the FCA Act. 19 The next set of submissions by the Commissioner concerns what he says is the "proper approach to the determination of solvency in a voidable transaction case". He submits that the question of solvency, which is to be determined with reference to s 95A of the Act, is a question of fact to be determined in all the circumstances and taking into account commercial realities. He submits that there is no reason to find that the quantity of the documentary evidence is so great or its contents so opaque as to suggest that its interrogation for the purposes of deciding the insolvency questions, conducted with the assistance of the parties' legal representatives at trial, is beyond the resources or expertise of the Court. 20 Included in what the Commissioner apparently submits is the "proper approach" is the submission that he should be able to conduct his case with the participation of his lawyers in determination of the insolvency questions and that procedural fairness demands that the factual allegations which the liquidators make be subject to the rules of evidence. He submits that there is no good reason why a central issue in the case on liability ought not to be subject to the same procedural and evidentiary conditions as is attached to proof of every other important aspect of the case. 21 The Commissioner also submits that considerations with regard to the mothership proceeding "whilst relevant ought not be decisive". He submits that the prompt determination of this proceeding, which is close to ready for trial, will, if the liquidators establish a finding of insolvency, create a presumption of insolvency for the purpose of the other cases. In that regard he refers to s 588E(8) of the Act.

Consideration of referral to a referee 22 In his submissions the Commissioner accepts, with reference to Optiver Australia Pty Ltd v Tibra Trading Pty Ltd [2012] FCA 558; 203 FCR 520 at [41] per Rares J, that the breadth of the grant of power by s 54A of the FCA Act to refer a question or questions to a referee does not permit of any a priori disposition in favour of or against the appointment of a referee based either upon the subject matter of the case or issue or the approach adopted in prior cases in which similar applications have been considered. In the light of that acceptance, the Commissioner's contentions that the subject matter of the proposed reference is not most appropriately dealt with by a referee, and that the standard or usual approach is for the court at trial rather than a referee to determine the question, cannot be accepted. 23 A few other matters should be noted. First, there is no entitlement to the determination of issues of fact or law by a judge: Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 558C-D per Gleeson CJ. Secondly, it has become more common to refer matters to a referee as attitudes to the use of referees have developed and changed: Kadam v MiiResorts Group 1 Pty Ltd (No 4) [2017] FCA 1139; 252 FCR 298 at [35]-[63] per Lee J. Thirdly, the exercise of the power is "quintessentially a case management decision" in which a consideration of the overarching purpose will likely be significant, if not determinative: Australian Securities & Investments Commission v AMP Financial Planning Pty Ltd [2018] FCA 1708 at [15] per Lee J. See also Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] FCA 1340; 19 ANZ Insurance Cases 62-158 at [13] per Allsop CJ; Commissioner of Taxation v Caratti [2018] FCA 465 at [24]-[31] per Colvin J. 24 The Commissioner's submissions would be considerably more persuasive if his was the only matter in which the insolvency questions arise. However, a critical consideration, which is essentially overlooked by the Commissioner's submissions, is that the same questions arise in relation to, presently, 14 other defendants. Each of those defendants has put in dispute the insolvency of the companies at the material times. Except for two who are jointly represented and one which has not yet entered an appearance, the 14 defendants are separately represented, i.e. there are 12 different legal teams representing the 14 defendants. 25 Against that background, reference to the overarching purpose, and in particular the desirability of avoiding the possibility of conflicting decisions and multiple appeals on insolvency in the different cases, weighs heavily in favour of two conclusions. One is that the insolvency questions should be decided commonly across all the claims. The other is that that should not be done in the conventional way of each defendant having the opportunity to adduce evidence and cross-examine. 26 In the latter regard, because of the many defendants across the two proceedings, the insolvency questions will in my view be most efficiently, effectively and justly determined in an investigative inquisitorial process undertaken by a referee rather than in an adversarial adjudicative process of a trial. Not only are there 15 separate defendants (including the Commissioner), but each has slightly different emphases in the six-month time period under consideration. That is with reference to the timing of the particular payments to each defendant and from which of the four companies they were received. Adjudication of those matters through a trial process involving multiple cross-examiners is likely to be lengthy and messy. 27 The difficulties that I have identified with regard to the insolvency questions being determined in a conventional trial will not be solved by a single court-appointed expert witness who will then still be subject to multiple cross-examinations. Also, that approach presupposes that this proceeding is in any event consolidated with the mothership proceeding which will still result in delay in this proceeding. 28 I do not consider that the fact that the Commissioner raises defences under ss 553C and 588FG has a material bearing on the question of referral. These issues will, of course, have to be dealt with, as will various defences specific to other individual defendants in the mothership proceeding. It may be that there is some overlap in evidence on the insolvency questions and such defences, but the overlap is not complete and it will still be more efficient to determine the insolvency questions separately. 29 The Commissioner's submission with regard to findings on the insolvency questions in one proceeding being presumptively applicable in the other proceeding under s 588E(8) is also not persuasive. That is because of the legitimate interest that the other 14 defendants have in participating in the determination of those questions and the potential unfairness to them in having the insolvency questions subjected to a presumption as a result of a proceeding in which they can play no part. 30 With regard to the resources and expertise of the Court, I have no doubt that the Court has the expertise to determine the insolvency questions in the usual way, and it would find the resources to do so if required. But neither of these considerations is to the point. At the heart of the issue is the most efficient use of the expertise and resources available to the Court taken together with doing justice between the parties. Neither of these considerations - the Court's expertise and resources and doing justice between the parties - supports the determination of the insolvency questions in a conventional trial. 31 I accept that it has hitherto not been common for the question of insolvency in unfair preference proceedings to be determined by a referee. Aside from that not being a relevant consideration, there have been such referrals in the recent past, as was accepted by the Commissioner. That is apparent from at least two judgments on the adoption of referees' reports, namely Weston in his capacity as liquidator of Starcom Group Pty Ltd (in liq) v Rajan [2019] FCA 1455 and Stone v Ebeid [2020] FCA 343, although because referrals are typically ordered as an incident of case management it may be that there are many other referrals in respect of which no written reasons were published. 32 The orders in the mothership proceeding require the referee to submit their report on or before 12 February 2021. That is only a few months hence. Whilst I accept that the referral will cause some delay in the present proceeding, I do not consider that that outweighs the considerations in favour of a referral. That is in particular because the delay will not be significant, there is no particular prejudice to the Commissioner in there being a delay of that magnitude, and the advantages of the insolvency questions being determined in common across all the proceedings are overwhelming. Thus, even if there was no referral and the insolvency questions were determined in a conventional trial, that course would inevitably create considerable delay in the present proceeding. 33 There is no right to have the rules of evidence apply to the determination of the insolvency questions, or to cross-examine. Moreover, the Commissioner identifies no particular point of prejudice in that regard or that will arise from the referee investigating and determining the insolvency questions by conducting the reference "in such manner … as will, without undue formality or delay, enable a just, efficient, timely and cost-effective resolution of the reference" as is provided for in the orders in the mothership proceeding. The Commissioner has not identified any respects in which the referral procedure will deny him procedural fairness, and he has not indicated any evidential objection to Mr Jahani's insolvency report. 34 I do not accept the Commissioner's submission that an insolvency practitioner is not an appropriate referee. Whilst the determination of the insolvency questions may not require any particularly advanced skill in the areas of accounting and bookkeeping, it is for the most part an accounting exercise whilst also taking into account the commercial realities of the companies at the relevant time. Those are matters very much within the expertise and experience of an accountant who is an insolvency practitioner. They do not involve difficult or contested questions of law, and are not likely to involve weighing the credit of witnesses. In any event, the identity of the referee is still to be determined by the process that I have put in place in the mothership proceeding so this issue can still be considered in that process. 35 In the circumstances, I consider that it is most consistent with the overarching purpose for the insolvency questions in respect of all the claims in both proceedings to be referred to a single referee for inquiry and report in accordance with the Rules as provided for in s 54A of the FCA Act.

Consolidation 36 Rule 30.11 is in the following terms: 30.11 Consolidation of proceedings before trial If several proceedings are pending in the Court and the proceedings: (a) involve some common question of law or fact; or (b) are the subject of claims arising out of the same transaction or series of transactions; any party to any of the proceedings may apply to the Court for an order that the proceedings be: (c) consolidated; or (d) heard together; or (e) heard immediately after one another; or (f) stayed until the determination of any of the other proceedings. 37 As I have indicated, the two proceedings involve common questions of fact, namely whether each of the companies was insolvent at the time that each of the payments was made in the period 1 December 2016 to 31 May 2017. The power under the rule is accordingly enlivened. 38 The same considerations as applied in me granting leave in the mothership proceeding for all 28 defendants to be joined apply in relation to consolidation of this proceeding with the mothership proceeding. There should therefore be consolidation.

Conclusion 39 In the circumstances, I will make orders consolidating the proceedings and that the orders made on 22 October 2020 in the mothership proceeding (i.e. the referral orders) apply to the parties to this proceeding. 40 Insofar as the costs of the plaintiffs' interlocutory application is concerned, it is relevant that the plaintiffs first sought orders of the nature of those sought in the interlocutory application at a case management hearing on 22 October 2020. The solicitor appearing for the Commissioner in the case management hearing said that because only a few days' notice of those orders had been given to the Commissioner, the Commissioner had not been able to give instructions with regard to his attitude to the orders. It was submitted on behalf of the Commissioner that no referral to a referee should be made in those circumstances and that procedural fairness required that a formal application for such referral should be made. I then put in place a timetable for the filing of the interlocutory application and submissions on either side. 41 As has been seen, the Commissioner ultimately resolved to oppose referral to a referee. I have not been persuaded by the Commissioner's grounds of opposition. Moreover, in view of the multiple claims that raise the same issue the considerations in favour of a referral are overwhelming. In those circumstances, the costs should follow the event meaning that the Commissioner should pay the plaintiffs' costs of the interlocutory application. 42 As I made no order with regard to the costs of the case management hearing on 22 October 2020, those costs are costs in the cause. I see no reason to disturb that result, and no one has asked me to do so. The application of the orders of 22 October 2020 in the mothership proceeding, which included an order that the costs of the hearing on that day be costs in the cause, to the parties to this proceeding will confirm that result. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

SCHEDULE OF PARTIES NSD 2208 of 2018 Plaintiffs Fourth Plaintiff: SAID JAHANI AND JOHN MCINERNEY AS JOINT AND SEVERAL LIQUIDATORS OF DELTA SBD LTD (IN LIQUIDATION) ACN 127 894 893

Federal Court Rules 2011(Cth)r 30.11, Div

Corporations Act 2001(Cth)ss 95A, 553C, 588E, 588FC, 588FE, 588FF, 588FG

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