Oates v Hawkins

Judgment 1This is an application to vacate the hearing of this matter which is set down for 15 days commencing next Monday, 5 September 2011. 2Before dealing with the application itself, I should say something about the dispute and the events leading up to the present application. 3The plaintiff, Mr Oates, alleges that in or about 1998 he, the first defendant, Mr Hawkins, the second defendant, Mr Tyne, and a Mr Graham formed a joint venture to arrange and manage structured finance transactions for a fee and that that joint venture was pursued through a company (now in liquidation) known as Matrix Group Limited which acted as trustee of a unit trust known as The Matrix Finance Group Unit Trust. 4It is alleged that the company (as trustee) earned fees from the Western Australian government totalling $17,554,113.93. Those fees were paid by four cheques made payable to the company. However, it is alleged that, instead of banking those cheques into a company account in Australia, they were endorsed in favour of a company known as FSA International and paid into an account in the name of that company in Singapore from where the moneys are said to have been disbursed to companies associated with Mr Hawkins and Mr Tyne. 5Paragraph 63 of the further amended statement of claim ( FASC ) pleads that the purpose of Mr Hawkins and Mr Tyne in causing the cheques to be lodged in Singapore and to be endorsed in favour of FSA International was "to conceal the existence of those payments from the Australian regulatory authorities, including AUSTRAC and the Australian Taxation Office ( ATO ), and from the creditors of Matrix including Oates". The words "the creditors of Matrix including" were added in the FASC. 6Prior to 25 May 2010, para 96 of what was then an amended statement of claim ( ASC ) pleaded: Hawkins and Tyne caused the transfers of the Matrix Receipts to FSA International and thereafter to companies associated with Hawkins and Tyne with the intention of: (a) avoiding alerting the Australian Taxation Office to the revenue derived by Matrix from the Matrix Receipts; (b) defrauding the Australian government of the taxation revenue which Matrix was and is obliged to pay; and (c) defrauding creditors of Matrix including Oates. 7On 31 March 2010, Bergin CJ in Eq heard an application to strike out parts of the ASC. Her Honour delivered judgment on 25 May 2010: Oates v Hawkins [2010] NSWSC 491. Relevant to para 96 of the ASC, her Honour said: 70 The defendants framed this issue as "whether there is available evidence" to support the plaintiff's allegations in relation to certain aspects of the SOC [that is, the ASC]. The first matter was the alleged second payment in respect of the WA Bus Transaction of $6.5 million. The second was the claim that Scott Macleay was a fictitious person and the third was the claim that the defendants' conduct was to, inter alia, avoid detection by the Australian Taxation Office. 71 The first and second matters are matters for trial and should not be decided at this pleading stage. I regard the third matter as quite otiose, having no relationship or relevance to the claims made against the defendants. It will be struck out. 8As a result, paras 96 (a) and (b) have been deleted from the FASC. 9It appears that one response made by the first and second defendants to the allegations in para 96 of the FASC is that Matrix had no creditors. That issue is addressed in an affidavit sworn by Mr Oates on 29 November 2010. In particular, in para 108 of that affidavit Mr Oates states that he believed the ATO was a creditor or future creditor of Matrix in 2001 and 2002 and sets out his reasons. In response to that allegation, Mr Tyne has sworn an affidavit on 15 June 2011 in which he explains why he did not consider that the company had any creditors. In particular, in para 13 says: I was of the belief that at all relevant times: (a) MGL [that is, the company] merely acted as a bare trustee of the MUT [that is, the trust]. I refer to the accounts of MGL and of the MUT which I would read each year; (b) the unitholders of the MUT were presently entitled, sui juris beneficiaries resident in Australia at least until I and Mr. Hawkins moved to the UK with our respective families in late 2001 or early 2002; (c) MGL was entitled to a trustee's indemnity from the MUT, from my reading of the MUT deed and my knowledge of Australian law as a former barrister; and (d) MUT had sufficient funds to meet its indemnity obligations to MGL, from my review of the accounts of the company. In para 14, Mr Tyne relevantly says: ... (b) it was my understanding of Australian tax law as it then was, there was no legal basis by which the trustee of a trust (in respect of which all trust beneficiaries were presently entitled, sui juris and resident in Australia) could, as a matter of law, be responsible to pay tax upon the income of a trust estate. On that basis I did not believe the Australian Taxation Office ever was or could ever have been a creditor of MGL, as alleged by Mr Oates, in respect of the 2001 year of income. ... Mr Tyne goes on to say in para 17: For the reasons expressed above I did not consider the Australian Taxation Office was or ever could become a creditor of MGL. Contrary to the suggestion made at paragraph 108 of the Oates Affidavit, at the point of deregistration of MGL, the Australian Taxation Office was not a creditor of MGL. I believe there is no basis for any assessment or amended assessment of tax to be raised against MGL. 10Prior to 10 June 2011, no directions had been made for the filing of expert evidence. On 9 February 2011, Bergin CJ in Eq directed that the parties confer by 2 March 2011 to agree on the extent either party intends to rely on expert evidence and any directions in relation to the service of expert evidence. There appears to be some debate between the solicitors for the parties concerning what happened following that direction. However, I do not think it is necessary for me to resolve that debate. On 10 June 2011, I gave directions by consent that the plaintiff serve expert evidence by 5 August 2011 and that the active defendants serve expert evidence in response by 19 August 2011. At the time that direction was given, I think it was obvious from the pleadings and the affidavit sworn by Mr Oates on 29 November 2010 that there was a question whether the ATO was a creditor or a future creditor of Matrix and whether the payments were made to FSA International in order to defraud creditors of Matrix. I think it can be inferred from that second issue that there is also an issue whether Matrix accounted for the receipt of the payments. 11Shortly after 5.00 pm on 5 August 2011, the plaintiff served an expert report from Mr Humphreys, a chartered accountant employed by Moore Stephens. On 8 August 2011, the plaintiff served a further expert report from Mr Blackwell, who is a partner of Moore Stephens. 12Broadly speaking, Mr Humphreys' report covers two issues: (a)Whether the payments made by the Western Australian government were recorded in the financial statements, general ledgers or tax returns of Matrix or the trust; (b)If the answer to (a) is no, whether those amounts should have been recorded in the financial statements and general ledgers and whether the relevant amounts should have been treated as assessable income and, if so, whether Matrix (in its own right or as trustee) had any liability to pay income tax or any other tax in respect of those payments; 13Mr Blackwell, who is an expert in tax, gives a short expert report in which he substantially concurs with the opinions expressed by Mr Humphreys in relation to tax questions. 14The active defendants seek to vacate the hearing date in the light of these expert reports or alternatively seek an order that the plaintiff not be entitled to rely on the reports. In support of those orders, Mr Stitt QC, who appeared on behalf of the active defendants, put four principal arguments: (a)First, he said the case was not urgent and consequently no prejudice would be caused by an adjournment; (b)Second, he submitted that the reports were not relevant having regard to the decision of Bergin CJ in Eq to strike out subparas (a) and (b) of para 96 of the ASC and a concession he made during the course of the hearing of the motion that the active defendants would not read para 14(b) of Mr Tyne's affidavit sworn on 15 June 2011, the first sentence of para 17 of that affidavit and the balance of para 17 if the plaintiff did not read para 108 of his affidavit sworn on 29 November 2010; (c)Third, Mr Stitt submitted that the expert reports raised new issues that were not pleaded or particularised insofar as they dealt with the question whether the relevant amounts were not disclosed in the financial statements, general ledgers or tax returns of the trust rather than the company; (d)Fourth, Mr Stitt submitted that the active defendants did not have sufficient time to obtain expert evidence in response to the expert evidence of Mr Humphreys. In support of that submission the active defendants relied on an affidavit sworn by Mr Paul Welch, a director of the Tax Services Division of RSM Bird Cameron. It appears from that affidavit that Mr Welch was first approached by the solicitors for the active defendants on 17 August 2011 to prepare a report in response to Mr Humphreys' report. Mr Welch was given a letter of instructions on 22 August 2011. Mr Welch says that he will be in a position to finalise his report in response to the questions asked of him by Friday 30 September 2011. 15In my opinion, the first 3 matters referred to by Mr Stitt do not provide a sufficient basis to vacate the hearing date. 16As to Mr Stitt's first point, although the matter may not be urgent in the sense that a decision is required by a particular time, the court has set aside 3 weeks starting next week for the hearing of this case. The orderly administration of the court's lists requires the court to vacate hearing dates only where it is clearly necessary to do so. That is not just a matter of the court's convenience. The list is administered in a way which is designed to ensure that all litigants' cases are heard as quickly as possible. The unnecessary vacation of hearing dates is inconsistent with achieving that goal. 17As to Mr Stitt's second point, there is clearly an issue between the parties whether the first and second defendants' caused the transfer of the relevant amounts to FSA International with the intention of defrauding creditors of Matrix including Mr Oates. That issue, in turn, raises the question whether Matrix had any creditors. In response to that issue Mr Oates asserted in an affidavit sworn on 29 November 2010 that, in addition to him, he believed that the ATO was also a creditor or future creditor of Matrix. Mr Tyne responded to that affidavit on 15 June 2011. Even if the active defendants do not read paragraphs 14(b) and the first sentence of paragraph 17 of Mr Tyne's affidavit, there is clearly an issue whether the transfers were made with the intention of defrauding creditors, whether receipt of the relevant amounts were disclosed in the financial records of Matrix and whether the ATO was a creditor. Mr Humphreys' report goes to those issues. 18As to Mr Stitt's third point, I do not accept that a new case is raised by the allegation that the relevant amounts were not disclosed in the financial statements, general ledgers or tax returns of the trust. Paragraphs 71 to 82 of the FASC make allegations about the financial reports of Matrix. In response to those paragraphs the active defendants plead in para 82 of the defence to the FASC the following: By way of further answer to paragraphs 71 to 82 of the FASOC, the defendants say that: (a) at all material times, Matrix was a trustee of the Matrix Unit Trust or held property on trust and otherwise had no business; (b) the accounts of the Matrix Unit Trust were maintained separately from the accounts of Matrix in its own capacity; and (c) the allegations in paragraphs 71 to 79 relate to the accounts of Matrix in its own capacity and not the accounts of the Matrix Unit Trust or otherwise as trustee. The active defendants no doubt included this paragraph because they thought that there was a question whether the allegations in the FASC related to the company only. The allegation raised by para 82 is taken to have been put in issue: see UCPR r 14.26, 14.27. The ultimate allegation made in para 96 of the FASC is that what was done was done with the intention of defrauding creditors of Matrix. As Mr Leeming SC, who appeared on behalf of the plaintiff, pointed out, the trust and Matrix are not separate legal entities and it is at least arguable that the allegation that something was done with the intention of defrauding creditors of Matrix must be interpreted as an allegation that the creditors who were defrauded were creditors of Matrix whether Matrix was acting as trustee in relation to the relevant transaction or in its personal capacity. As Mr Leeming also points out, the active defendants have issued subpoenas seeking documents relating to the trust. If they really believed that there was no issue in relation to the trust, it is hard to understand why those subpoenas were issued. 19By saying what I have said, I should not be taken as having made any decision in relation to para 82 of the defence to the FASC. The only point that is relevant in the present circumstances is that the active defendants could not be taken by surprise that the plaintiff asserts that the financial statements, general ledger and tax returns of the trust are relevant to the allegations the plaintiff makes. 20That leaves the last point raised by Mr Stitt. I accept that this point has considerable force. However, I have concluded that the matters raised are not sufficient to justify the vacation of the hearing date in this case. I say that for several reasons. 21First, it is relevant that it appears that no steps were taken by the active defendants to engage an expert before 17 August 2011, although directions were made by consent on 10 June 2011 for the filing of expert evidence and, as I have said, it seems clear that there was an issue between the parties whether the receipt of the relevant amounts were disclosed in Matrix's financial statements and whether the ATO was a creditor of Matrix. 22Secondly, in my opinion, the active defendants have exaggerated the factual complexity of the issues that must be addressed in an expert report. As I have said, there are, broadly speaking, two issues. One is whether the receipt of the relevant amounts was recorded in particular financial documents. The other is whether it ought to have been recorded in those documents and whether tax was payable on those amounts by Matrix. The first set of issues raises what seems to me to be straightforward factual issues which must be within the knowledge of the first and second defendants. I do not see why an accountant would have any difficulty in expressing an opinion on those factual questions if there really is a dispute concerning them. 23I accept that the second set of questions - and, in particular, the question whether tax was payable on the relevant amounts - is a more complicated question. The difficulty, however, is that that essentially is a legal question which must be addressed by the parties in submissions whether or not expert evidence is filed. To the extent that the report of Mr Humphreys addresses legal questions, I would not read the report as expert evidence to be given weight as other expert evidence would be. Rather, I would treat that part of Mr Humphreys' report as submissions. For that reason, it is not clear that Mr Blackwell's report is admissible at all since it simply expresses agreement with Mr Humphreys' opinions on questions of taxation law. There may be a question of precisely which paragraphs of Mr Humphreys' report should be read in that way. However, it seems to me that ultimately a substantial part of Mr Humphreys' report will be admitted only as submissions. To that extent, those submissions could have been made by the plaintiff at the end of the case by cutting and pasting the relevant paragraphs into the plaintiff's final submissions. In my opinion, that is relevant to the question whether the active defendants will suffer any prejudice if the hearing is not vacated. 24Thirdly, I think that the prejudice that the active defendants say they will suffer can be accommodated by giving them additional time in which to file expert evidence and, if necessary, permitting them to lead evidence in chief orally in relation to those paragraphs of Mr Humphreys' report which are admitted as evidence if Mr Welch finds it impossible to complete his report within time. Mr Stitt said that the active defendants will still be prejudiced because he will not have sufficient time to prepare his cross-examination of Mr Humphreys. However, Mr Humphreys will not give evidence until the week starting 19 September 2011. As I have said, I expect that a significant part of his report will only be received as submissions. In those circumstances, I am not satisfied that Mr Stitt will have inadequate time to prepare. 25It follows that the active defendants' motion filed on 31 August 2011 should be dismissed. I will hear the parties on what directions should be made.