Lord & Anor v Commissioner of Taxation

John F Lord (First Plaintiff)

Lion Graphics Pty Limited (In Liquidation) (Second Plaintiff)

v PARTIES : Commissioner of Taxation (Defendant)

Carlo Cattaruzzi (First Respondent)

Marissa Crepaldi (Second Respondent) JUDGMENT OF : Acting Master Berecry

Ps: N/A COUNSEL : D: Mr M R Aldridge SC 1R: Mr Smith 2R: Mr D B McGovern Ps: Hardings, Lawyers SOLICITORS : D: Australian Government Solicitor 1R: Cordato Partners 2R: PricewaterhouseCoopers Legal, Lawyers CATCHWORDS : Insolvent & voidable transactions - indemnity from directors - when does the cause of action arise - when can the Commissioner of Taxation commence proceedings - whether proceedings should be commenced by originating or interlocutory process Corporations Law, ss588FC, 588FE, 588FF, 588FGA Corporations Law Rules, r2.2 LEGISLATION CITED : Supreme Court Act 1970 Supreme Court Rules 1970 Supreme Court Rules 1985 (VIC) Civil Procedure - Victoria, N J Williams Browne v Deputy Commissioner of Taxation (1998) 153 ALR 10 CASES CITED : Silvia v Commissioner of Taxation [2001] NSWSC 562 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 ANZ Banking Group Ltd v Turnbull & Partners Ltd (1991) 33 FCR 265 DECISION : See paragraph 41 for orders.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

TUESDAY, 21 AUGUST 2001 3518/01 - JOHN F LORD & ANOR v COMMISSIONER OF TAXATION JUDGMENT 1 MASTER: This application is brought by way of Notice of Motion filed on behalf of the second respondent and seeks to set aside the Interlocutory Process filed by the defendant, the Commissioner of Taxation, on 20 July 2001. Alternatively, the second respondent seeks an order that the proceedings, as between the defendant and the second respondent, be stayed. 2 Mr Smith mentioned his appearance, by way of a watching appearance, on behalf of the first respondent and he informed me that he would be seeking the same orders in relation to the first respondent, although the first respondent makes no submissions. 3 The Originating Process was filed on 31 July 2001. Proceedings were commenced in the Common Law Division by a Statement of Claim filed on 24 January 2001 and subsequently transferred to the Equity Division. 4 The first plaintiff is the liquidator of the second plaintiff, Lion Graphics Pty Limited ("the Company"). It is asserted in the Statement of Claim that, within six months prior to 8 November 1999, payments had been made by the Company to the defendant. The background to these proceedings is set out in the Statement of Claim. 5 On 8 November 1999, the Company entered into voluntary administration and the first plaintiff was appointed as receiver. On 3 December 1999, pursuant to a meeting of creditors, the Company entered into liquidation and the first plaintiff was appointed as the liquidator. 6 The plaintiffs seek recovery of the moneys that had been paid to the defendant. The plaintiffs rely on various sections of the Corporations Law, asserting that the payments made were characterised as insolvent transactions and voidable transactions pursuant to ss 588FC and 588FE of the Corporations Law. 7 The defendant filed an Interlocutory Process on 20 July 2001. The Process seeks a declaration that the first and second respondents to the Interlocutory Process are liable to indemnify the defendant pursuant to s 588FGA of the Corporations Law. It then seeks ancillary orders for the payment of money. 8 The application by the second respondent is brought on the basis that these proceedings are premature and that a liability to pay by way of an indemnification only crystallises once there has been payment by the defendant if, in fact, payment is found to be made in the principal proceedings. Until that time, it is premature for the defendant to bring the Interlocutory Process, whether in existing proceedings or otherwise. 9 Counsel for the second respondent, Mr McGovern, has taken me to a number of matters to persuade me that the orders sought in the Notice of Motion ought to be made. The starting point is the relevant provisions of the Corporations Law. Section 588FGA relevantly provides as follows:- (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 : (a) section 221F (exception 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) … 10 There is also provision for the indemnity to be brought in the existing proceedings. There is a parallel provision in the Corporations Law Rules, r 2.2(2), which is consistent with s 588FGA(4). 11 It has been a statutory provision and a provision found in regulations or rules of some standing that, in winding up proceedings, certain parties may use those proceedings to pursue other rights or remedies. The most common example is when a liquidator, in winding up proceedings, claims in relation to various rights that he may have under the Corporations Law. 12 The intention of the legislation was to create a regime which would enable a liquidator to recover assets of a company for ultimate distribution amongst the creditors, causing the least amount of expense to the liquidator. The Corporations Law Rules also express that intention in r 2.2(2). 13 Mr McGovern submitted that the intention of the legislation, concerning these proceedings, does not go so far as to enable the defendant to institute its Process at a time, either prior to the making of an order under s 588FF by the Court or prior to the payment by the defendant of the amount ordered under s 588FF. Mr McGovern has taken me to a number of authorities together with the explanatory memorandum dealing with the relevant parts of the Corporations Law. 14 The defendant, by its counsel, Mr Aldridge SC, submits that the steps taken by it are not premature and are within the spirit of either the Corporations Law Rules or the Corporations Law. In Mr Aldridge's opinion, the legislation makes provision for the defendant to bring an action, by way of interlocutory process, at any time after proceedings have been commenced under s 588FF. 15 It is also submitted that the true nature of the Process brought by the defendant is analogous to a cross-claim in the principal proceedings and, therefore, the Interlocutory Process is not premature. Mr Aldridge has relied on a number of authorities, together with the relevant provisions of the Corporations Law. There is nothing in the Corporations Law, as I interpret it, which would prevent the defendant from filing the Interlocutory Process at a time either prior to the making of an order pursuant to s 588FF, or prior to the payment by the defendant to the liquidator of the moneys found to be payable pursuant to an insolvent transaction which is voidable. 16 There may be practical considerations that would cause any of the parties in this case to raise objections to the two matters being heard together. From the liquidator's position, it may well be that the liquidator does not know the nature of the evidence that is likely to be given by officers of the Company. 17 The liquidator may also object to the two matters being run together because of potential additional costs that he may have to meet whilst the Interlocutory Process is dealt with. The defendant, obviously, in this case, is of the view that it would be expeditious and convenient for all parties to run both matters at the same time. 18 There are, of course, provisions in the Supreme Court Act, 1970 and the Supreme Court Rules, 1970 for matters, involving the same parties in similar issues, to be determined at the one time. It may well be against the interests of the directors of the Company to be brought into proceedings where, at the end of the day, the liquidator may fail. If the liquidator fails to obtain, under s 588FF, his statutory rights, then, so far as that part of the Corporations Law is concerned, it is at an end. There would be no payment by the defendant and, therefore, there would be no loss or damage suffered by the defendant and there would be no claim for indemnity from any of the directors. It is all these contentions that need to be balanced to determine what should be the appropriate way to proceed with such an application. 19 Mr McGovern has referred to the relevant sections of the Corporations Law and the different matters that are in issue under each of those provisions. He has pointed out that the claim by the liquidator against the defendant is different to any claim that the defendant may have against the directors of the Company. 20 However, at the end of the day, whilst that is true, a major component is, of course, whether or not the Company was solvent during the relevant period. To that issue, there are the elements that the plaintiffs have to prove in the first instance and there are defences that arise for the defendant and, in the Interlocutory Process, for the directors which go to the question of solvency. It seems to me, therefore, that it may not be a task which would create a prejudice for one party or another. 21 A number of decisions were referred to by both Mr McGovern and Mr Aldridge. It seems to me that the key decisions are the Full Court of the Federal Court in Browne v Deputy Commissioner of Taxation (1998) 153 ALR 10 and Silvia v Commissioner of Taxation [2001] NSWSC 562 at [7]. 22 The cases relied upon by Mr Aldridge are, inter alia, Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 and Australia and New Zealand Banking Group Ltd v Turnbull & Partners Ltd (1991) 33 FCR 265. There are references to other cases but it seems to me that these cases probably assist more than the other cases do. One case by illustration reflects, perhaps, a practice developing in the Court and the others go to matters of law. 23 The decision of the Full Court of the Federal Court in Browne v Deputy Commissioner of Taxation makes reference to the timing of the indemnity payment. The Court considered various sections that I have referred to and made reference to the interpretation of those sections at first instance and its view of that interpretation. That decision supports Mr McGovern's submission in relation to when the indemnity arises. Under the heading "Timing of the indemnity payment", their Honours said, at p 17, as follows:- "In our opinion once the Commissioner pays an amount to the company or liquidator in accordance with a court order under s 588FF, directors of the company at that time become liable to indemnify the Commissioner in respect of the amount of payment; it is that payment that constitutes 'the loss or damage resulting from the order' of the court." 24 Their Honours then go on and make some other comments about the position of the directors. That case clearly states when the liability arises. That case appears to have been run as a parallel case with proceedings involving the recovery by the liquidator of moneys that were, in his view, preference payments to the liquidator. 25 The matter of Silvia v Commissioner of Taxation appears to be based on the provisions that are the subject of these proceedings. In that case, the liquidator of two companies brought proceedings against the Commissioner of Taxation to recover payments that had been made to the companies by the Commissioner within the relevant time. The Commissioner filed cross-claims against the directors pursuant to s 588FGA of the Corporations Law. The particular decision goes to whether or not certain affidavits should be read in the proceedings, an objection having been raised on behalf of the liquidator. Although it was not directly in issue in that particular application, it appears that Hamilton J did not think that the cross-claim brought by the Commissioner was premature, inappropriate or embarrassing. He was mindful of the evidentiary problems that may face some of the parties in relation to the affidavit evidence and bearing in mind the two types of claims that were being run concurrently. His Honour, being alive to that, reassured counsel that there would be protection in relation to evidence which may be accepted, without any demur on the part of counsel, as evidence against all parties. 26 That case appears to have proceeded on both limbs, i.e., an application for an order under s 588FF and an application for an order under s 588FGA. The point about that case is that it would appear, certainly so far as the Supreme Court of New South Wales is concerned and, perhaps, one particular judge, that there is no problem in both applications being run at the same time. 27 Mr McGovern submitted that, until there had been findings made in respect of the insolvent and voidable transactions application, there was no basis for a claim to be brought against the directors of the Company and that, therefore, the Interlocutory Process should be set aside. I take it, from Mr McGovern's submissions, that what is being said is that, within those two provisions of the Corporations Law, they provide a discrete form of relief for the respective applicants under those various sections and that the way one should interpret those sections is to firstly read s 588FF as a provision which requires a discrete hearing. If at the end of the day orders are made in favour of the liquidator, that then acts as a trigger, provided there was also payment by the defendant before application can be brought under the later section. This regime, therefore, would require the application under s 588FGA to be brought, at the earliest, after the Court has made orders under s 588FF. 28 Mr Aldridge makes, not unnaturally, a different interpretation of the provisions. He also relies on the law as it deals generally with the right to indemnity. His starting point is, firstly, that the relevant provisions of s 588FGA place no temporal limitation on the defendant. Subsection (1) merely crystallises a liability on the happening of a certain event, that being an order made under s 588FF. 29 The legislation is silent as to when proceedings or an application can be brought by the defendant. That being the case, there is nothing to prevent the defendant from commencing proceedings or bringing an application, either at the time when he becomes aware of the voidable transactions proceedings or at any time after an order is made against the defendant. 30 It seems to me that that is the proper construction to be placed on the legislation. Looking at the provisions, once the order is made, it is clear from the legislation that the defendant can make an election. If the proceedings have not already been commenced, he can commence the proceedings based on the order made under s 588FF and bring those proceedings, by virtue of the provisions in the Corporations Law and in the Corporations Law Rules, by way of application in the proceedings instituted by the liquidator or he can bring those proceedings in any court of competent jurisdiction. 31 The next matter that Mr Aldridge raises is the practice in relation to indemnity claims. In Port of Melbourne Authority v Anshun Pty Ltd supra, at p 595, Gibbs CJ, Mason and Aickin JJ said the following:- "Although the right to an indemnity arises on payment of the liability to which it relates and not before, this is not a bar to the litigation as between a defendant and a third party, or as between defendants, of a claim based on an indemnity in respect of a liability in negligence asserted by the plaintiff in his action." 32 Of course, that is a common practice in both the Supreme Court and the District Court in relation to personal injury claims. Mr McGovern submitted that that particular passage from Anshun should not be read too widely but one should focus on the words "a liability in negligence" and not move beyond that. However, I do not know whether their Honours, in making that statement, were intending to limit the interpretation of indemnity to that degree. 33 In the headnote of Australia and New Zealand Banking Group Ltd v Turnbull & Partners Ltd, the following catchwords are interesting:- "Whether cross-claimant suing for damages for breach of provisions of Trade Practices Act 1974 (Cth) or for negligence must have suffered damage before entitled to cross-claim". 34 It is interesting for this reason, because it picks up on the tortious characterisation of a claim as well as statutory breaches. At pp 273-274 of that decision, Sheppard J cites the comments of Gibbs CJ, Mason and Aickin JJ in Port of Melbourne Authority v Anshun Pty Ltd. At p 274, his Honour then cites Civil Procedure - Victoria, by N J Williams, and the Supreme Court Rules, 1985 (VIC). Although his Honour refers to the Victorian practice, I do not think that it is that far removed from the practice in New South Wales that it should be disregarded. The following comments come from N J Williams, at pp 2760-2761:- "The liability of a person joined as third party to make contribution or pay an indemnity to the defendant is contingent upon the defendant being found liable to pay money to the plaintiff; the defendant can recover from the third party by way of contribution or indemnity only if his own liability to the plaintiff is established. See Bradley v Eagle Star Insurance Co Ltd [1989] 1 All ER 961 at 965. Normally, a proceeding cannot be brought in respect of a cause of action which has yet to accrue. A proceeding so brought would be dismissed as premature. It is a peculiar characteristic of the third party procedure that the defendant can, by filing and serving a third party notice, claim contribution or an indemnity before his liability to the plaintiff is established, that is, before any cause of action for contribution or indemnity has arisen. Furthermore, as the claim of the plaintiff and the third party claim are normally heard together, the third party is able to contest the question of his own liability to the defendant notwithstanding that the question of the liability of the defendant to the plaintiff has yet to be determined and that it is possible that ultimately the question may be decided against the plaintiff: see Hordern-Richmond Ltd v Duncan [1974] KB 545 at 552, per Cassels J; Nickels v Parks (1948) 49 SR (NSW) 124; Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 595; Australian Mutual Provident Society v GEC Diesels Australia Ltd [1989] VR 407."

By analogy, the same principle would apply to s 588FGA. 35 There are a number of decisions quoted at the foot of that passage to which I shall not refer. 36 Mr McGovern referred to the term "cause of action". It would seem to me that, as a general proposition, so far as a claim based on indemnity is concerned, the law allows a defendant to commence proceedings or to institute either a third party claim or a cross-claim, on the basis that there is an arguable right to indemnity notwithstanding that it is not crystallised as a cause of action at the time that an application is instituted. There are provisions in the Supreme Court Rules protecting against litigation being brought which may cause embarrassment or be oppressive or create an unreasonable expense to a party. The most obvious one, so far as costs is concerned, is, of course, Pt 31. 37 These proceedings are proceedings based on rights and liabilities under the Corporations Law and they are commenced under the provisions of the Corporations Law Rules. However, where those Rules are silent, the Supreme Court Rules apply and, therefore, parties have the protection of the Supreme Court Rules if there are matters of concern which require the Court to make determinations for the proper and fair prosecution or defence of proceedings. In my view, therefore, as a general proposition, the defendant is entitled to bring the application, by way of interlocutory process, at a time and in the manner that he has done so. 38 In any event, it would seem to me that, on the authorities that I have been referred to today, there is provision at the end of the hearing of a s 588FF claim for the Court to make declaratory orders in relation to indemnification. That, of course, would reduce the time and the expense of double-barrelled litigation. 39 Therefore, I decline to make the orders sought in the Notice of Motion filed on 30 July 2001. 40 Mr Smith, who appears on behalf of the first respondent, does in fact have a watching brief today but his instructions are to concur with Mr McGovern on anything that he puts to the Court. Mr Smith, I note, has also given an undertaking that his client agrees to be bound by any order or finding made by the Court in the s 588FF application. In effect, he will not attempt to raise, as a defence, anything which attempts to question the orders made by the Court pursuant to the s 588FF application. 41 On that basis and on Mr Aldridge informing me that he can see no prejudice to be suffered by his client, I make the following orders:- (1) that the proceedings as between the defendant and the respondents be stayed until the determination of the proceedings between the plaintiffs and the defendant unless the Court otherwise orders; (2) as to the balance of the Notice of Motion, the Notice of Motion be dismissed; and (3) the costs of the Notice of Motion are to be the defendant's costs in the cause. **********

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