Noxequin Pty Ltd v Deputy Commissioner of Taxation

CATCHWORDS : CORPORATIONS - winding up - insolvent transactions - recovery of preferences - claim by liquidator against Commissioner of Taxation - Commissioner joins company's sole director as third party - no contest by Commissioner - director puts liquidator to proof of insolvency - whether insolvency established - principles on which interest should be included in order for payment made against Commissioner - whether director can be subjected to separate order for payment of interest - principles on which costs should be awarded where no contest by Commissioner and director declined to admit insolvency ultimately proved

Civil Procedure Act 2005, s.17(3) LEGISLATION CITED : Corporations Act 2001 (Cth), ss.95A, 588FA, 588FC, 588FE, 588FF(1), 588FGA Taxation Administration Act 1953 (Cth), Subdivision 16B of Schedule 1 Uniform Civil Procedure Rules 2005, rules 17.3(1), 17.3(2), 42.8(2)

Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471 Browne v Deputy Commissioner of Taxation (1998) 82 FCR 1 Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 Condon (as liquidator of Justinprint Pty Ltd) v Commissioner of Taxation (2004) 49 ACSR 681 Cooper (as liquidator of Wanted Worldwide (Australia) Pty Ltd) v Commissioner of Taxation (2004) 210 ALR 635 Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 Crosbie v Commissioner of Taxation (2003) 130 FCR 275 Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd) v Commissioner of Taxation (No 2) (2004) 49 ACSR 325 Duncan v Commissioner of Taxation (2006) 58 ACSR 555 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711 Hall (as liquidator of New Tel Ltd) v Ledge Finance Ltd [2005] NSWSC 645 Hall (as liquidator of Reynolds Vineyards Pty Ltd) v Commissioner of Taxation (2004) 51 ACSR 169 Hall (as liquidator of Reynolds Wines Ltd) v Commissioner of Taxation (2004) 51 ACSR 173 CASES CITED : Harris (as liquidator of Denlizco Trading Pty Ltd) v Commissioner of Taxation (2006) 57 ACSR 706 Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1 Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 Jones v Dunkel (1959) 101 CLR 298 Keith Smith East West Transport Pty Ltd v Australian Taxation Office (2002) 42 ACSR 501 Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410 Millane v Nationwide News Pty Ltd [2004] NSWSC 1023 Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 Star v O'Brien (1996) 40 NSWLR 695 Superior Press Pty Ltd v Deputy Commissioner of Taxation (2004) 55 ATR 541 Tolcher v National Australia Bank Ltd (2003) 174 FLR 251 Travers v Commissioner of Taxation (2006) 58 ACSR 472 Woodgate (as liquidator of Fairlight ESP Pty Ltd) v Commissioner of Taxation [2006] NSWSC 778 Young (as liquidator of TransAustralian Pty Ltd) v Commissioner of Taxation (2006) 56 ACSR 654

Noxequin Pty Limited - First Plaintiff PARTIES : Anthony Milton Sims - Second Plaintiff Deputy Commissioner of Taxation - Defendant James Soong - Third Party

Mr D.L. Cook - First and Second Plaintiffs COUNSEL : Mr P.A. Fury - Defendant Mr J.B. Costigan - Third Party

Gadens Lawyers - First and Second Plaintiffs SOLICITORS : Australian Taxation Office, Legal Services Branch - Defendant Diamond Conway - Third Party

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

5181/05 NOXEQUIN PTY LIMITED & ANOR v DEPUTY COMMISSIONER OF TAXATION JUDGMENT 1 Mr Sims (the first plaintiff) is the liquidator of Noxequin Pty Limited (the second plaintiff). It will be convenient to refer to them as "the liquidator" and "the company". 2 By originating process dated 26 September 2005, the liquidator seeks an order for the payment of money against the defendant, Deputy Commissioner of Taxation ("the Commissioner"). The claim is made under s.588FF(1) of the Corporations Act 2001 (Cth). The court is empowered to make various orders under that section if an application is made by a company's liquidator and the court "is satisfied that a transaction of the company is voidable because of section 588FE". 3 There are four transactions of the company said by the liquidator to be "voidable because of section 588FE". Each is a payment of money made by the company (see paragraph (d) of the definition of "transaction" in s.9). The payee, in each case, was the Commissioner. The payments and their dates are as follows: $ 76,628.00 31 December 2003 $ 11,627.00 5 March 2004 $ 17,313.00 6 April 2004 $ 21,894.00 7 May 2004

4 The liquidator alleges (and the Commissioner does not deny) that each of these payments was an "unfair preference" within the meaning of s.588FA. The liquidator further alleges (and the Commissioner does not deny) that, at the time each payment was made, the company was insolvent, with the result that the payment was an "insolvent transaction" of the company as defined by s.588FC. The final allegation of the liquidator (also not denied by the Commissioner) is that each payment was made during the period starting six months before the "relation-back-day" in relation to the winding up (11 June 2004) and ending on or before the day when the winding up began by virtue of the making of a winding up order by this court (27 July 2004). 5 The combined effect of the status of each transaction as an "insolvent transaction" of the company and its having been entered into within the period just mentioned is that, by virtue of s.588FE(2), the transaction is "voidable". It is the circumstances that a transaction is "voidable" in the s.588FE sense that empowers the court to make any of certain orders in relation to it pursuant to s.588FF. This is the effect of s.588FF(1). 6 There is, as I have said, no contest between the liquidator and the Commissioner as to the availability of the s.588FF jurisdiction in relation to each of the four transactions involving, in total, $127,462, being the aggregate of the four sums to which I have referred. The Commissioner concedes the several elements necessary to found the jurisdiction. Such a concession or admission constitutes a sufficient basis for the court to be "satisfied" as mentioned in s.588FF(1), as between the liquidator and the Commissioner: Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd) v Commissioner of Taxation (No 2) (2004) 49 ACSR 325; Cooper (as liquidator of Wanted World Wide (Australia) Pty Ltd) v Commissioner of Taxation (2004) 210 ALR 635; Hall (as liquidator of Reynolds Vineyards Pty Ltd) v Commissioner of Taxation (2004) 51 ACSR 169; Young (as liquidator of TransAustralian Pty Ltd) v Commissioner of Taxation (2006) 56 ACSR 654; Harris (as liquidator of Denlizco Trading Pty Ltd) v Commissioner of Taxation (2006) 57 ACSR 706. 7 At this point, however, I must refer to the fact that Mr Soong, who was at all material times the sole director of the company, has been made a party to the proceedings by the Commissioner. Of the total of $127,462 involved in the four transactions, $46,928 (or some 36.8%) related to liabilities of the company of the kind referred to in Subdivision 16B of Schedule 1 to the Taxation Administration Act 1953 (Cth). This brings into play s.588FGA of the Corporations Act which I quote in full: " Directors to indemnify Commissioner of Taxation if certain payments set aside

(1) This section applies if the Court makes an order under section 588FF against the Commissioner of Taxation because of the payment of an amount in respect of a liability under any of the following provisions of the Income Tax Assessment Act 1936 : (aa) former section 220AAE, 220AAM or 220AAR; (a) former section 221F (except subsection 221F(12)), former section 221G (except subsection 221G(4A)) or former section 221P; (b) former subsection 221YHDC(2); (c) former subsection 221YHZD(1) or (1A); (d) former subsection 221YN(1); (e) section 222AHA; or under a provision of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 . (2) Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order. (3) An amount payable to the Commissioner under subsection (2): (a) is a debt due to the Commonwealth and payable to the Commissioner; and (b) may be recovered in a court of competent jurisdiction by the Commissioner, or a Deputy Commissioner of Taxation, suing in his or her official name. (4) The Court may, in the proceedings in which it made the order against the Commissioner, order a person to pay to the Commissioner an amount payable by the person under subsection (2). (5) A person who pays an amount under subsection (2) has the same rights: (a) whether by way of indemnity, subrogation, contribution or otherwise; and (b) against the company or anyone else; as if the payment had been made under a guarantee: (c) of the liability referred to in subsection (1); and (d) under which the person and every other person who was a director of the company as mentioned in subsection (2) were jointly and severally liable as guarantors." 8 It follows that, if the court makes an order for payment against the Commissioner at the suit of the liquidator by reference to the whole or some part of the $46,928, Mr Soong, as the company's sole director at the time payment was made by the company, will be liable pursuant to s.588FGA(2) to indemnify the Commissioner "in respect of any loss or damage resulting from the order". 9 As a procedural matter, the Commissioner has proceeded against Mr Soon`g in the manner contemplated by s.588FGA(4) and amplified in Condon (as liquidator of Justinprint Pty Ltd) v Commissioner of Taxation (2004) 49 ACSR 681, that is, by filing an interlocutory process in the proceedings instituted by the liquidator against the Commissioner. In accordance with approaches taken in several cases (see, for example, Crosbie v Commissioner of Taxation (2003) 130 FCR 275 and Hall (as liquidator of Reynolds Wines Ltd) v Commissioner of Taxation (2004) 51 ACSR 173), it was accepted that Mr Soong thereby became a party to the proceedings brought by the liquidator against the Commissioner and was accordingly entitled to participate fully. 10 At (and in advance of) the hearing, it was made clear that only one issue was contested and that Mr Soong intended to put the liquidator to proof on the question of insolvency - that is, the question whether, at each of the dates mentioned in paragraph [3] above, the company was insolvent. In the pre-trial phase, the liquidator invited Mr Soong to admit that the company was insolvent on each relevant day. The response was that no admission would be made. To be specific, Mr Soong's solicitors said that he "does not admit that at the time the ATO received payments from Noxequin, Noxequin was insolvent". 11 The question whether a company is solvent at any particular time is to be answered in the way dictated by s.95A of the Corporations Act: " Solvency and insolvency

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent." 12 In contending that the company was insolvent at each relevant date, the liquidator relies on a report made by Mr A.G. Topp, a chartered accountant and registered liquidator. His claim to have the necessary training, experience and skills was not challenged and is fully borne out by his curriculum vitae. 13 In preparing his expert evidence, Mr Topp had regard to and relied on material obtained upon search in relation to the company at the Australian Securities and Investments Commission and "all other records of Noxequin in the possession of the Official Liquidator or other information contained in the files of the Official Liquidator". His report contains a summary description of the content of 55 boxes of documents of the company held by the liquidator. The descriptions make it clear that, while a large quantity of material was held, it was not necessarily complete. At the same time, however, there were what appear to be formally prepared management accounts for the years ended 30 June 2002, 2003 and 2004, the full general ledger for the period July 2003 to June 2004 running to 107 pages, all bank statements for the same period and a report as to affairs dated 23 August 2004 provided by Mr Soong. It may thus be seen that, leaving aside the last item, Mr Topp had access to comprehensive and contemporary financial records apparently prepared in the ordinary course of financial management without reference to winding up or impending winding up. Speaking particularly of the ledger, Mr Topp said in cross-examination that, in his work, he came across nothing in those contemporary records to call into question their veracity. 14 In his report, Mr Topp referred to the two approaches commonly taken to the assessment of solvency - an analysis based on a cash flow test and a review of assets and liabilities by way of balance sheet test. He stated that the former is, in terms of s.95A, predominant. That this is the correct approach was recognised by the Court of Appeal in Keith Smith East West Transport Pty Ltd v Australian Taxation Office (2002) 42 ACSR 501, among other cases (see, for example, Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410; Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471). The effect and implications of s.95A are, in my respectful view, accurately reflected in the following passage in the judgment of Dodds-Streeton J in Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 at p.652: "Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets." 15 The emphasis must be upon the extent of cash and other liquid assets (by which I mean assets readily convertible into cash), compared with the quantum of debts due and payable and to become due and payable in the immediate future. A comparison between the two can be made only as at a particular point but a state of solvency requires that, at each such point, the cash and liquid assets be sufficient to cover the debts due and payable and to become due and payable in the immediate future. But it is going too far to say that insolvency exists if there is, at a particular point, insufficiency. Such insufficiency is indicative of insolvency but is also consistent with the possibility of a temporary lack of liquidity. The indication of insolvency will be confirmed if the insufficiency represents an "endemic shortage of working capital": Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559. 16 Adopting the cash flow approach, Mr Topp examined the company's "working capital" position at each of the four dates in question. He took "working capital" to be the excess (if any) of current assets over current liabilities, with current assets consisting of cash at bank, petty cash, debtors and clearing accounts and current liabilities consisting of trade creditors, tax payments due and provisions. At each relevant date, Mr Topp found that current liabilities exceeded current assets. 17 Mr Topp's report expresses opinions taking account of certain variables. The position is examined on the basis that loans to and from associated companies should be taken into account, on the basis that such loans should be left out of account, on the basis that debts to the Commissioner should be recognised in the way the company in fact recognised them and on the basis that debts to the Commissioner should be recognised in larger amounts indicated by records obtained by the liquidator from the Australian Taxation Office. On all such bases, there was, on each relevant date, a deficiency of working capital. This makes it unnecessary to decide which basis is the correct or most appropriate one. It is sufficient to record the several possible amounts of deficiency referred to in Mr Topp's report from the several relevant dates: 30 December 2003 5 March 2004 5 April 2004 7 May 2004 $ 432, 915.22 $ 725,487.72 $ 479,059.41 $ 708.974.04 $ 463,090.70 $ 798,316.49 $ 534,723.55 $ 816,914.88 $ 346,402.23 $ 657,440.34 $ 505,492.25 $ 608,360.54

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. **********

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