18 Mr Costigan of counsel, who appeared for Mr Soong, cross-examined Mr Topp in a way which led ultimately to a submission challenging the reliability of his report. Mr Costigan did not question the basic approach. It was submitted, however, that the liabilities taken into account by Mr Topp in reaching his conclusions with respect to working capital were not confined to short-term liabilities - or, more precisely, that the liquidator had not shown that short-term liabilities of the relevant kind were the only liabilities to which Mr Topp had had regard in making his assessment of solvency. It was suggested that Mr Topp may have treated as a current liability a debt owed to a related entity properly treated as a non-current liability.
19 Mr Costigan concentrated on one item included in the general ledger to which Mr Topp paid attention, being an item of $330,000 as at 30 June 2004 under the heading "Trade Creditors". Mr Costigan drew attention to the report as to affairs furnished by Mr Soong which showed a debt of $407,311.28 owing to a related entity, Beywood Management Services Pty Ltd, as at 28 July 2004.
20 The general ledger shows Beywood as owing the company $937.27 as at 30 June 2004, with substantial movements having occurred in the account from its inception in September 2003 with an entry of $19,348.00 in respect of a loan. By May 2004, the balance was $560,937.27 ($541,229.75 plus $19,707.52). The account then reflects a reduction of $560,000 to leave the balance of $937.27 to which I have referred.
21 Mr Soong's report as to affairs is, on its face, not inconsistent with this aspect of the general ledger. The report as to affairs recognises the position depicted in the general ledger with respect to Beywood. In Schedule B dealing with "sundry debtors", Mr Soong recorded, in relation to "Beywood Management Services P/L", a figure of $937.27 under both "amount owing" and "amount realisable". This accords with the general ledger where precisely the same figure of $937.27 is shown as a receivable of the company after allowing for the $560,000 reduction at the end of May 2004.
22 It is sufficiently clear, in my opinion, that the debt of $407,311.28 recorded in the report as to affairs as owing by the company to Beywood is separate from the residual balance of $937.27 which the general ledger shows to be owing by Beywood to the company after allowing for the reduction of $560,000.
23 Furthermore, there is nothing in the documents to which Mr Topp had regard, as attached to his report, to suggest that the $330,000 item in the general ledger in June 2004 for trade creditors has anything to do with Beywood. There is no apparent correspondence between a figure of $330,000 at 30 June 2004 and a figure of $407,311.28 some four weeks later on 28 July 2004. Mr Topp said in cross-examination that he had no reason to connect the $330,000 with Beywood. It was put to him that he could not be sure that the $330,000 did not represent a claim by Beywood. He accepted that this was so. He also said, however, that he had no reason to question the veracity of the contemporary company documents he was given. On the basis of the evidence before him, Mr Topp was of the opinion that, if any debt of $407,311.28 was owing by the company to Beywood at 28 July 2004, it arose after 30 June 2004. He observed that Beywood itself had gone into liquidation on or about 14 July 2004. He was not aware of any formal claim by Beywood in the winding up of the company but noted that, as both administrations involved the same firm of liquidators, any such matter would probably not be dealt with formally.
24 The person best placed to provide reliable information about any discrepancy between the position represented by the ledger and the position actually pertaining - as well as information about the meaning and significance of the $407,311.28 item in the report as to affairs - is Mr Soong. He is a party to the proceedings. He took an active part in them and was represented by counsel. He was the sole director of the company at all relevant times. But he did not give evidence. Mr Costigan referred to having been briefed only the day immediately before the hearing. It must be assumed that Mr Soong was then available to give him instructions. It should also be assumed that Mr Soong was available to give evidence by way of affidavit sworn in advance of the hearing or, subject to leave, by oral testimony at the hearing itself. He did not seek to do either of these things.
25 From this, I was invited by Mr Cook, counsel for the plaintiffs, to infer (and do infer) that evidence given by Mr Soong would not have assisted his case by throwing doubt on the correctness of the conclusions reached by Mr Topp or, in particular, by providing some foundation for a finding - or even a well-based suspicion - that the $330,000 taken into account as part of trade creditors (and therefore part of current liabilities) was in reality a debt owing to Beywood, a related entity, in such a way as to warrant treatment as part of non-current liabilities: Jones v Dunkel (1959) 101 CLR 298. Mr Soong's deliberate choice not to give evidence in support of a contention regarding a matter peculiarly within his knowledge as the company's sole director tells convincingly against such a finding or suspicion.
26 In the result, therefore, I accept Mr Topp's evidence and the conclusions expressed by him. On that basis, I find that the company was insolvent on each of 31 December 2003, 5 March 2004, 6 April 2004 and 7 May 2004. Since insolvency at material times was the only matter Mr Soong sought to put in issue, I hold that the liquidator is entitled, as against the Commissioner, to relief generally as sought in paragraphs 1 to 5 of the originating process, that is, declarations that the four payments totalling $127,462 were voidable transactions and an order pursuant to s.588FF that the Commissioner pay money to the company; and that the Commissioner is entitled to the relief sought in the interlocutory process, that is, a declaration that Mr Soong is liable to indemnify the Commissioner pursuant to s.588FGA(2) and an order that Mr Soong pay money to the Commissioner.
27 It is, however, necessary to deal with some matters of quantification by way of amplification of the orders for the payment of money and the declaratory relief involving Mr Soong.
28 In relation to the order that the Commissioner pay money to the company, the liquidator takes the view that the relevant quantum should not be limited to the aggregate sum of $127,462. The liquidator says that an interest element should be added. The liquidator served demand on the Commissioner on 17 January 2005 in respect of the full $127,462. The Commissioner at no stage disputed the entitlement of the liquidator to an order for what is, in substance, restitution to the estate of the company in liquidation for the sums paid by the company to the Commissioner (although, in saying this, I do not mean to suggest that the company will recover the moneys paid; rather the liquidator asserts a statutory cause of action which may produce a like result: see Tolcher v National Australia Bank Ltd (2003) 174 FLR 251; Hall (as liquidator of New Tel Ltd) v Ledge Finance Ltd [2005] NSWSC 645).
29 Given the conceptually restitutionary nature of the undisputed claim, there should be an appropriate interest component: Star v O'Brien (1996) 40 NSWLR 695; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651. The Commissioner accepts that the interest component should be computed from the date of the liquidator's demand, 17 January 2005. But there is a question about the date to which interest computed from 17 January 2005 should run. On one view, there should be interest on the aggregate of $127,462 from 17 January 2005 to the date on which the Commissioner is ordered to make payment to the company. That might properly be regarded as the period for which the estate of the company in liquidation has been deprived of its just entitlement. A different view is taken by the Commissioner. The submission made on behalf of the Commissioner by Mr Fury of counsel is that interest should be computed from 17 January 2005 to 4 July 2006, being the date on which the Commissioner advised the other parties that the Commissioner would not be defending the liquidator's claim or leading evidence.
30 The Commissioner says that, even though the Commissioner might in theory have succumbed to consent orders on 4 July 2006, that course was, in reality, denied because of the nature of the proceedings. The Commissioner points to the discussion in Hall (as liquidator of Reynolds Wines Ltd) v Commissioner of Taxation (above) at pp.177-179. In the particular statutory context, it is the making of a s.588FF order against the Commissioner that triggers the liability of third parties caught by s.588FGA. Even where the s.588FF order is made by consent as between the liquidator and the Commissioner, the adverse consequence for such third parties arises under s.588FGA(2).
31 It was for that reason that the view was taken in Hall, adopting thinking in the earlier case of Crosbie v Commissioner of Taxation (above), that persons against whom s.588FGA liability is asserted should, as statutory third parties, have full opportunity to contest the liquidator's entitlement to s.588FF relief against the Commissioner. This is a generally accepted incident of third party status: see Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1.
32 I accept that, for the reason just stated, the Commissioner was, as it were, compelled to remain the non-consenting defendant in the present proceedings beyond the point at which the Commissioner effectively consented to the grant of the relief sought by the liquidator for the benefit of the insolvent estate of the company. By 4 July 2006, the day on which the Commissioner announced that there would be no contest, Mr Soong was already a party to the proceedings. He had become a party at the instigation of the Commissioner through the Commissioner's interlocutory process filed on 10 January 2006. The merits of the claim the liquidator sought to pursue against the Commissioner were, from 4 July 2006, to be fought out between the liquidator and Mr Soong alone.
33 In those circumstances, the substantive result should be that the estate of the company in liquidation receives the benefit of interest on the aggregate of $127,462 from 17 January 2005 to the date of the s.588FF order. While it is arguable that, as a matter of fairness, Mr Soong and not the Commissioner should bear the burden of the whole of the interest (not just interest on the $46,928) after 4 July 2006, I am not satisfied that it is open to me to make such an order.
34 The court plays no direct or immediate part in determining the liability of Mr Soong. Under s.588FGA, he is, simply by reason of his having been a director of the company at relevant times, "liable to indemnify the Commissioner in respect of any loss or damage resulting from the order", that is, the order made under s.588FF against the Commissioner because of an amount in respect of liability under the relevant provision of the Taxation Administration Act. The liability is wholly statutory and arises independently of any order made by the court against the director. The "loss or damage resulting from the order" is, in the present context, confined to the loss or damage resulting from the order based on the $46,928 component of the total of $127,462.
35 It is clear, in the present case, that the main component of the relevant loss or damage will be so much of the aggregate sum of $127,462 as represents amounts in respect of liability under provisions of Subdivision 16B of Schedule 1 of the Taxation Administration Act, that is, the $46,928. Furthermore and as Mr Fury pointed out on behalf of the Commissioner, that quantum will not be reduced by any estimate of the dividend that the Commissioner may receive in the winding up of the company: Browne v Deputy Commissioner of Taxation (1998) 82 FCR 1. If any dividend becomes payable, Mr Soong will stand in the shoes of the Commissioner by right of subrogation and may recover the dividend accordingly.
36 A further component of the "loss or damage" referred to in s.588FGA will be so much of any interest included in the aggregate ordered under s.588FF to be paid by the Commissioner as is properly attributable to the $46,928. When the total of $127,462 is notionally broken into two parts - the $46,928 relevant to s.588FGA and the balance of $80,498 unrelated to s.588FGA - I am not satisfied that any part of the interest awarded that is attributable to the $80,498 can properly be regarded as included in the "loss or damage" to which s.588FGA refers. The elements of that loss or damage must be confined to sums which have a logical connection with the $46,928. An order formulated on the basis for which the Commissioner contends (that is, that the Commissioner bear the burden of interest on the full $127,462 only until 4 July 2006) would, in respect of the $46,928 element, mean that the interest component of the "loss or damage resulting from the order" was only that proportion of the total interest to 4 July 2006 that $46,928 bears to $127,462, that is, 36.8%. There is no basis on which it could be said (or the court could ensure) that the "loss or damage resulting from the order" was inflated by some further amount of interest notionally attributable to the period after 4 July 2006. The court cannot make the "loss or damage resulting from the order" something different from what the order actually visits upon the Commissioner because of the payment of amounts in respect of taxation liabilities of the specified kinds (that is, the amounts totalling $46,928). This point is emphasised in the judgment of Young J in Duncan v Commissioner of Taxation (2006) 58 ACSR 555 at p.583.
37 I return, therefore, to consider whether it is, in truth, appropriate that interest be allowed on the full $127,462 only to 4 July 2006. I have already said that interest up to the date on which the Commissioner is ordered to make payment to the company should be regarded as appropriate compensation for the period for which the estate of the company in liquidation has been deprived of its due. The question whether that appropriate compensation should be reduced is properly raised by the circumstance that the Commissioner would have paid the full amount on 4 July 2006 had this not been precluded by the position taken by Mr Soong.
38 Where, for reasons stated, there is no mechanism for sheeting home to Mr Soong interest on the $80,498 for any period after 4 July 2006, it seems to me necessary to recognise another significant matter raised by Mr Cook of counsel on behalf of the plaintiffs, namely, that the Commissioner will have had the use and benefit of the full $127,462 up to the date of the s.588FF order. It is perhaps unusual to regard a revenue authority or consolidated revenue as having the use and benefit of tax moneys collected. But there is no reason of principle why such a view should not be taken. On that basis, the Commissioner should be regarded as having derived advantage from retention of the full $127,462 beyond 4 July 2006 and until the date of the s.588FF order, so that formulation of the order to include interest from 17 January 2005 to the date of the order does not entail any element of unfairness of the kind implied by the submissions made on behalf of the Commissioner.
39 The outcome in relation to interest will be, first, that the sum of $127,426 to be paid to the company by the Commissioner will be augmented by interest at court rates from 17 January 2005 to the date of the order and, second, that, in recognition of the operation that s.588FGA(2) has independently of any order, an order will be made under s.588FGA(4) (reflecting a like declaration) that Mr Soong pay to the Commissioner that proportion of the interest so to be paid by the Commissioner to the company that $46,928 bears to $127,462 - plus, of course, the sum of $46,928 itself.
40 The final matter to be addressed is costs. On the basis that costs follow the event, the plaintiffs should have a costs order against the Commissioner and Mr Soong. As between the Commissioner and Mr Soong, however, it should be recognised that the Commissioner would have brought the proceedings to an end on 4 July 2006 had it not been for the continuing opposition of Mr Soong. I accept the submission made on behalf of the Commissioner that the Commissioner should be ordered to pay the costs of the plaintiff up to and including 4 July 2006 and that Mr Soong should be ordered to pay the costs of the plaintiffs after 4 July 2006.
41 It was submitted by Mr Cook on behalf of the plaintiffs that the plaintiffs' costs to be paid by Mr Soong should be assessed on the indemnity basis. The plaintiffs base that submission on a letter of 16 August 2006 sent by the plaintiffs' solicitors to Mr Soong's solicitors and the reply to that letter. The letter of 16 August 2006 read in part as follows:
"Pursuant to our letter dated 3 May 2006, we invited the parties to admit that at the time the Defendant received the payments from Noxequin detailed in the Originating Process, Noxequin was insolvent. The Defendant has made such admission.
In the event that your client does not admit insolvency, it will be necessary for the liquidator to prepare and serve an expert report in respect of this issue. The liquidator estimates the cost associated with this report to be in the range of $15,000 to $25,000. If successful in the proceedings the liquidator will seek to recover its legal costs as well as the costs of preparing that report from your client.
Should you contest or not admit Noxequin's insolvency, in accordance with the principle set down in Calderbank v Calderbank [1976] Fam 93, we put you on notice that the liquidator will seek the costs thereby incurred, including in respect of the solvency report, from you on a full indemnity basis."
42 The response from Mr Soong's solicitors dated 23 August 2006 was as described at paragraph [10] above :
"The cross-defendant does not admit that at the time the ATO received payments from Noxequin, Noxequin was insolvent."
43 It was submitted on behalf of the plaintiffs that the letter of 16 August 2006 was (or included) a notice of the kind referred to in rule 17.3(1) of the Uniform Civil Procedure Rules 2005 (that is, a notice requiring Mr Soong "to admit, for the purposes of the proceedings only, the facts specified in the notice") and that the response of 23 August 2006 was a "notice disputing" the relevant facts, as mentioned in rule 17.3(2). As a consequence, it is said, rule 42.8(2) applies (the references therein to the "requesting party" being a reference to the plaintiffs and the reference to the "disputing party" being a reference to Mr Soong):
"Unless the court orders otherwise, the disputing party must, after the conclusion of proceedings in which a fact in dispute is subsequently proved or is subsequently admitted by the disputing party, pay the requesting party's costs, assessed on an indemnity basis, being costs incurred by the requesting party:
(a) in proving the fact, or
(b) if the fact has not been proved - in preparation for the purpose of proving the fact."
44 It is, of course, clear that the question whether a company is insolvent is a question of fact: see, for example, Lewis (as liquidator of Doran Constructions Pty Ltd) (above) at p.434 ([109]); Travers v Commissioner of Taxation (2006) 58 ACSR 472 at p.479 ([39]). The regime created by the rules of court for inviting admissions of fact and creating costs consequences where admissions are not forthcoming and the facts are later proved should, in Mr Cook's submission, therefore be regarded as applicable.
45 I note that the letter of 16 August 2006 did not refer to the rules of court and did not say explicitly that the invitation it conveyed, if not accepted, might be relied on in relation to costs. Nor was the invitation in the approved form (Form 16) which, according to s.17(3) of the Civil Procedure Act 2005, "is to be" used. Nevertheless, the message conveyed by the letter was unmistakable and Mr Soong's refusal, by the reply, to admit insolvency can, in light of the outcome, be seen to have been unreasonable - particularly since, as I have found, his case was confined to raising suspicions about the Beywood matter, something that was within his own knowledge and about which he elected to give no evidence.
46 As Hoeben J pointed out in Millane v Nationwide News Pty Ltd [2004] NSWSC 1023 (at [20]), the procedure now based on rule 17 is designed to prevent proceedings being needlessly prolonged. Where a party is invited to admit facts and declines to do so and the facts are later proved, it will often be the case that the party is thereby seen to have acted unreasonably. This is so whether or not approved forms are used. In this case, the party concerned not only declined to make the admission but also elected not to go into evidence in a situation where his own knowledge was crucial to the factual matter to be proved and which he had put in issue. Such conduct entails what Sheppard J, in Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 at p.257, described as "prolongation of a case by groundless contentions". This is an example of exceptional circumstances warranting an order for indemnity costs on general principle apart altogether from rule 42.8(2).
47 I am satisfied that costs on the indemnity basis should be awarded against Mr Soong and in favour of the plaintiffs in relation to proof of insolvency.
48 Taking into account not only the matters just discussed but also the considerations of proportionality already mentioned in the interest context, the outcome with respect to costs is that
(a) the Commissioner will be ordered to pay the plaintiffs' costs of the proceedings up to and including 4 July 2006;
(b) it will be declared that Mr Soong is liable to indemnify the Commissioner against that proportion of the costs referred to in (a) which $46,928 bears to $127,462 (in the same way as he is liable to indemnify in respect of a like proportion of the interest included in the sum ordered to be paid by the Commissioner) and it will be ordered that Mr Soong pay the Commissioner accordingly;
(c) Mr Soong will be ordered to pay the plaintiffs' costs of the proceedings after 4 July 2006; and
(d) all costs referred to in (a), (b) and (c) will be assessed on the party/party basis except for that part of the costs referred to in (c) which represents costs incurred by the plaintiffs in proving the insolvency of Noxequin Pty Limited, which part will be assessed on the indemnity basis.
49 I should add one brief observation about costs. There may, I think, be a suggestion in Woodgate (as liquidator of Fairlight ESP Pty Ltd) v Commissioner of Taxation [2006] NSWSC 778 at [83] and [84] that a third party in the position occupied here by Mr Soong cannot, in a proceeding of this present kind, be subjected to any liability for costs not forming part of the "loss or damage" referred to in s.588FGA(2). I agree that, if a costs order is made against the Commissioner in respect of recovery of the kind with which s.588FGA is concerned, those costs form part of the "loss or damage" referred to in the section. This has been recognised in several cases: see, for example, Superior Press Pty Ltd v Deputy Commissioner of Taxation (2004) 55 ATR 541 (at [39] - [40]) and Duncan v Commissioner of Taxation (above) at p.582 ([126]). But the fact that the third party actually becomes a party to the proceedings brought initially by the liquidator against the Commissioner (see paragraphs [9] and [31] above) means that that person also faces the full exposure to costs that is the lot of any party to proceedings in the ordinary course. I mention this because of elements (c) and (d) at paragraph [48] above. While element (b) follows from element (a) and s.588FGA, elements (c) and (d) represent exercise of the court's ordinary jurisdiction on costs in relation to parties.
50 I direct that agreed short minutes of orders to give effect to these reasons be filed by delivery to my Associate within seven days.
**********