CONSIDERATION
36 It was submitted on Mrs and Mr Oswal's behalf that they have assets in the jurisdiction that exceed the tax debt. I do not accept that submission. In any event, their only assets of any real value were either mortgaged by Mrs Oswal to Mercury or are the subject of assignments to Mercury said to have been effected by entry into the litigation funding agreements.
37 It was also submitted on behalf of Mrs and Mr Oswal that I should in any event disregard the tax debt when assessing whether there was a real prospect that the respondent would not be able to recover his costs of the proceedings brought by the applicants if they were unsuccessful and one or more of them was ordered to pay his costs. I do not accept this submission. The respondent's entitlement to security for costs must be evaluated against the distinct possibility that Mrs Oswal will not obtain the relief she seeks in her Part IVC proceeding and that she will be ordered to pay the respondent's costs or a substantial proportion of them.
38 Nevertheless, the tax debts evidenced by the judgment and the relevant notices of assessment must be understood for what they are. They reflect determinations by the respondent which he accepts were arguably made in error. Hence, for the purpose of deciding whether or not to order security for costs, and despite the substantial judgment that the Commissioner has already obtained against Mrs Oswal in other proceedings, the fact that the tax debts are the subject of challenges in the Part IVC proceedings which the respondent concedes are reasonably arguable, is a matter of considerable significance on the present application.
39 It was submitted on behalf of the applicants that to make an order for security against a taxpayer who brought a proceeding seeking to set-aside a tax assessment is beyond the power of the Court because, by requiring an applicant to provide security for costs, the Court would be lending its authority, and the force of its order, to the imposition of an "incontestable tax".
40 After Mrs and Mr Oswal foreshadowed this argument at a directions hearing, orders were made for the giving of notices pursuant to s 78B of the Judiciary Act 1903 (Cth). The question postulated in those notices, which were said to involve a matter arising under the Constitution or involving its interpretation, was as follows:
… whether a court in tax proceedings under Part IVC of the Taxation Administration Act 1953 may order dismissal of proceedings on non-payment of security for costs in circumstances where a taxpayer's rights to approach the Court to appeal an objection decision is what makes a tax constitutionally valid: Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146.
41 The provisions of Part IVC of the Administration Act that permit a taxpayer to challenge a tax assessment in this Court (and, with special leave, in the High Court) satisfy the requirement of the Constitution that a tax not be made incontestable: Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 at [9] per Gummow, Hayne, Heydon and Crennan JJ.
42 There is nothing to prevent the applicants challenging the validity of the relevant tax assessments in this Court. Indeed, they are in the very process of doing so, and have been engaged in that process since the time they commenced their proceedings under Part IVC of the Administration Act. The provisions of Part IVC provide them with "recourse to … judicial power" (Deputy Commissioner of Taxation v Brown (1958) 100 CLR 32 at 40) so that the question whether the relevant tax assessments were properly made may be judicially determined according to law.
43 Once the judicial process is engaged, as has happened here, it is for the Court to exercise its powers in the ordinary way. The Court has power to make procedural orders requiring a taxpayer to (inter alia) provide particulars, give discovery or file written evidence, together with the power to make costs orders against the taxpayer, and to stay or dismiss the taxpayer's proceeding, if he or she refuses or neglects to comply with such orders. Similarly, the Court has power to order that a taxpayer provide security for costs and to stay or dismiss the taxpayer's proceeding if he or she refuses or neglects to comply with such an order. Of course, the Court's discretionary powers in relation to these and all other matters must be exercised judicially and according to law.
44 The question whether the Commissioner could obtain security for costs in a proceeding by way of an appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") was considered by Hill J in Fletcher v Commissioner of Taxation (1992) 37 FCR 288. In that case the appeal was brought by the taxpayers (who were natural persons) pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth). The Commissioner filed a notice of motion seeking security for his costs of the appeal which he later abandoned. The taxpayers sought their costs of the motion which Hill J awarded to them. In his reasons for judgment his Honour indicated that it was at that time "unprecedented" in the conduct of taxation appeals in this country for the Commissioner to seek security against an applicant in such a proceeding.
45 It is clear from a reading of Hill J's reasons that he did not doubt that the Court had power under s 56 of the Act and what was then O 53, r 8 of the Federal Court Rules 1979 (Cth) to award security for costs, but that discretionary considerations weighed heavily in favour of not doing so against a natural person in a proceeding brought by him or her under Part IVC of the Administration Act.
46 In his reasons in Fletcher, Hill J referred to the well-known passage in the judgment of Bowen LJ in Cowell v Taylor (1885) 31 Ch D 34 at 38. His Honour said at 290:
As a general rule, in the exercise of its general discretion to order security for costs, a court will not make an order for security for costs against an individual plaintiff solely on the grounds of impecuniosity. Thus, in Cowell v Taylor (1885) 31 Ch D 34 at 38, Bowen LJ said:
"The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law, and also, I believe, in equity. There is an exception in the case of appeals, but there the appellant has had the benefit of a decision by one of Her Majesty's Courts, and so an insolvent party is not excluded from the Courts, but only prevented, if he cannot find security, from dragging his opponent from one Court to another. There is also an exception introduced in order to prevent abuse, that if an insolvent sues as nominal plaintiff for the benefit of somebody else, he must give security ... Those are the common cases, I do not say that there may not be others."
47 His Honour said at 291:
Clearly the fact that the present proceeding is an appeal from an administrative decision of a government authority, the Commissioner of Taxation, maintaining the imposition of income tax, would be no reason to depart from this general rule. Quite the contrary. Manifest injustice could well be done and would certainly be seen to be done if despite the conferral of a right to appeal to this Court on a question of law that right could, in the absence of special circumstances, be frustrated by the Commissioner requiring security to be given by an impecunious litigant.
48 His Honour then turned to consider various other authorities relating to "special circumstances" under Order 53, r 8, a rule specifically concerned with security for costs in appeals from decisions of the Tribunal. That rule provided that the Court could order that security for the costs of such an appeal be provided "in special circumstances". Hill J concluded at 293:
Given that, as a general rule and in the exercise of an unfettered discretion, mere impecuniosity of a plaintiff who is a natural person (not being an appellant from an existing judicial decision) will not be a ground for ordering that person to provide security, why should the position be different when the case arises under 0 53, r 8? Indeed, it is difficult to see, when the court's rules require the existence of "special circumstances" before security will be ordered, that the court would be more ready to make an order against an impecunious natural person than it would be if there was no request that "special circumstances" be present. This is not to say that impecuniosity will be irrelevant to the exercise of the discretion, but mere impecuniosity of itself will not generally result in an order being made.
For my part, I would add that it would be a rare case where security for costs would be awarded at the instance of the Commissioner of Taxation against a natural person seeking to appeal from a decision of the Administrative Appeals Tribunal reviewing an objection decision, where it was conceded that there was a real issue to be decided between the parties. Certainly more than mere impecuniosity would be required before the court's discretion would be exercised in a way which could bring about the inability of a taxpayer to challenge in a court a question of law affecting his liability to income tax.
49 The respondent sought to distinguish Fletcher on the ground that the proceeding in that case involved an appeal against a decision of the Tribunal. However, as Hill J's reasons make clear, what was significant in his Honour's judgment was that the appeal was not against a judicial decision, but a decision of the Tribunal.
50 The respondent also submitted that a factor that weighed in favour of an order for security was that the applicants chose to commence proceedings in this Court rather than by filing an application seeking review of the relevant tax assessments by the Tribunal. In support of this submission the respondent relied upon the decision of Southwell J in Athprom Ltd v Federal Commissioner of Taxation (1987) 87 FLR 465 in which his Honour made an order for security in favour of the Commissioner against a plaintiff company pursuant to s 533(1) of the Companies (Victoria) Code. His Honour considered it significant that the company had chosen to commence its proceeding in the Supreme Court of Victoria rather than seek review of the disputed tax assessment by the Tribunal in what is often referred to as a "no costs" jurisdiction. However, I consider the fact that the taxpayers could have sought to have their tax assessments reviewed by the Tribunal rather than in this Court to be a neutral consideration in deciding whether an order for security for costs should be made. This seems to me to be consistent with Hill J's approach in Fletcher.
51 Athprom was not referred to by Hill J in Fletcher, which is perhaps not surprising in that it involved an application for security for costs made against a company. Athprom is distinguishable on that basis. Moreover, there was no concession by the Commissioner in that case as to the existence of any arguable grounds of appeal, and in his reasons for judgment Southwell J said (at 466) that the evidence did not enable him to undertake any sensible evaluation of the company's prospects of success.
52 The applicants also submitted that security for costs should not be ordered against them because they are in substance in the position of defendants. In support of this submission they relied upon the decision of the High Court in Willey v Synan (1935) 54 CLR 175. In that case Dixon J (with whom Rich J agreed) said at 184:
The principle is that a party to judicial proceedings, who resides beyond the jurisdiction, should not be required to give security for costs unless, however the parties are arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purpose of establishing rights or obtaining relief. If he does avail himself of the remedies the jurisdiction provides in order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action.
His Honour referred with approval at 184-185 to the following statement of Scrutton LJ in Maatschappij voor Fondsenbezit v Shell Transport and Trading Co (1923) 2 KB 166 at 177:
The position, I think, extends to every case where the person against whom security is sought is really defending himself against attack, even if he be nominally a plaintiff, but really defending himself against defendants' previous action against him.
53 But, as was emphasised by Allsop CJ and Middleton J in Madgwick v Kelly (2013) 212 FCR 1 at [16], the language used by Dixon J in Willey and Scrutton LJ in Maatschappij voor Fondsenbezit does not require the Court to undertake a minute analysis of the relevant legal relationship between the party seeking an order for security and the party resisting the making of such an order. Nor do I think the Court is required to take a binary view of the question whether the applicants are, in substance, defendants or plaintiffs. The discretion to order security for costs under both s 56 and r 19.01(1) is broad and conferred in terms which make clear that it is not fettered by rules that prescribe how it is to be exercised in any given case: see King v The Commercial Bank of Australia Limited (1920) 28 CLR 289 at 292-293, Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Limited (1998) 193 CLR 502 at 513-515. The preferable approach is to consider the extent to which the proceeding brought by the applicant may reasonably be characterised as defensive. If it can be characterised as defensive, or at least as having a defensive element, then this may weigh against making an order for security for costs.
54 In the Part IVC proceedings the applicants have invoked the jurisdiction of the Court for the purposes of attacking the validity of the relevant tax assessments. Nevertheless, I view the proceedings as having a significant defensive element. Even if the proceedings are not regarded as defensive, the relief sought by the applicants, and the constitutional and statutory context in which that relief is sought, is still a highly relevant consideration when it comes to exercising the discretion.
55 I accept that, as a matter of general approach, there is a strong predilection against awarding security for costs against a natural person at least in proceedings at first instance that involve a bona fide claim. But the authorities demonstrate that there are some situations in which a different approach is often taken. One is where the applicant is a person who does not ordinarily reside in Australia, and who has no assets in the jurisdiction. Another is where the applicant is suing for the benefit of a third party. Both situations raise considerations that may weigh in favour of the court making an order for security for costs. However, these considerations are not determinative, and all relevant facts and circumstances must be considered for the purpose of deciding what weight they should be given when making what is a broad discretionary judgment.
56 The fact that the person bringing proceedings is ordinarily resident out of the jurisdiction, and that he or she has no assets in the jurisdiction can constitute a circumstance of great weight. As McHugh J pointed out in PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 at 323:
… the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide·security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction.
57 In Energy Drilling Inc v Petroz NL (1989) ATPR 40-954 Gummow J explained the purpose of making an order for security for costs against an applicant ordinarily resident outside the jurisdiction. His Honour said at 50,422:
The purpose of ordering security for costs against an applicant ordinarily resident outside the jurisdiction is to ensure that a successful respondent will have a fund available within the jurisdiction of this Court against which it can enforce the judgment for costs, so that the respondent does not bear the risk as to the certainty of enforcement in the foreign country and as to the time and complexity of the action there which might be necessary to effect enforcement … On the other hand, the mere circumstance that an applicant is resident outside the jurisdiction does not necessarily invite an exercise of discretion in favour of ordering security, the question being how justice will best be served in the particular case …
(citations omitted)
58 It was submitted by Mrs and Mr Oswal that any difficulty that the respondent may encounter in enforcing an order for costs against them has nothing to do with the fact that they reside overseas. Reliance was placed on what Morling J said in Barton v Minister for Foreign Affairs (1984) 2 FCR 463 at 469:
… it would be an odd result if an impecunious plaintiff was ordered to give security merely because he was ordinarily resident outside Australia, although his absence from Australia had little, if any, prejudicial effect on the respondent's prospects of recovering his costs."
59 Morling J made an order requiring the applicant to provide security for costs, but in a sum that was considerably less than appears to have been sought by the respondent in that case. It is apparent that his Honour's decision to award security in the lesser amount was heavily influenced by the fact that any judgment for costs awarded in favour of the respondent would be enforceable in the United Kingdom by virtue of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (UK). As his Honour observed, if the respondent registered his costs judgment in the United Kingdom, he would be in no worse position than if the applicant had been resident in Australia.
60 The United Arab Emirates is not a country referred to in the Schedule to the Foreign Judgments Regulations 1992 (Cth) and I am satisfied that any costs order obtained by the respondent in these proceedings could not be enforced against Mrs Oswal or Mr Oswal in the United Arab Emirates without considerable difficulty.
61 While it is clear that Mercury is required by the litigation funding agreements to pay fees, costs or charges in respect of the funding of an order for security, it is apparent that they do not by their terms require Mercury to provide security for costs. I therefore proceed on the basis that Mercury has no legal obligation under the litigation funding agreements to itself provide security for costs or to provide Mrs or Mr Oswal with the funds necessary to enable them to do so.
62 Be that as it may, there was no evidence to suggest that Mercury was either unable or unwilling to provide the applicants with the funds required in order to comply with any order for security for costs that may be made against Mrs or Mr Oswal. However, I was referred to some evidence which was relied upon in support of a submission that Mercury might seek to terminate the litigation funding agreements. In a letter dated 21 May 2015 written by Mercury's Australian solicitors to the applicants' solicitors, Mercury's position is said to be as follows:
… should the Court determine that the assignments under clause 3.1.2 of the Litigation Funding Agreements between Mercury Services Limited and Pankaj Oswal and Radhika Pankaj Oswal are invalid or ineffective in whole or in part, our clients will not make any further payments pursuant to the Litigation Funding Agreements.
63 The letter does not address the issue of security for costs and appears to have been directed at a suggestion from the respondent that the assignments purportedly effected by the litigation funding agreements might not be valid. However, the validity of those assignments is not an issue in the Part IVC proceedings. Nor is it an issue appropriate for determination in an interlocutory application made in proceedings to which Mercury is not a party. It is sufficient for me to say that Mrs and Mr Oswal have either assigned, or at least purported to assign, the proceeds of their claims against third parties (including any claims they have against the respondent for costs in the Part IVC proceedings) to Mercury pursuant to cl 3.1.2 of the litigation funding agreements.
64 The fact that Mercury has already paid some $31 million to lawyers acting for the applicants in the various legal proceedings referred to in the litigation funding agreements suggests that Mercury has access to large amounts of money with which to fund the conduct of such proceedings including, if necessary, by providing security for costs that Mrs and Mr Oswal are not themselves able to provide using their own funds. There was no evidence to the contrary from Mrs Oswal, Mr Oswal or any officer or representative of Mercury. Nor was there any suggestion to that effect in the letter from Mercury's Australian solicitors to which I have previously referred. I am satisfied that an order for security for costs in an appropriate amount will not stultify the Part IVC proceedings.
65 The proper exercise of the discretion to order security for costs requires the weighing of all relevant facts and circumstances. The matters to which I give particular weight are as follows:
The applicants are natural persons who are seeking to exercise their rights to challenge tax assessments made against them in a court of law by the only means available to them. The Part IVC proceedings have a "defensive" element to them, but not such as would preclude the making of an order for security for costs if the Court considered that it was appropriate to make such an order.
It is conceded by the respondent that the Part IVC proceedings are brought in good faith, and based upon reasonably arguable grounds. They are likely to be heard and determined within the next 12 months.
The applicants ordinarily reside outside the jurisdiction in the United Arab Emirates, a country with which Australia does not have any reciprocal arrangements for the enforcement of judgments. The respondent could not enforce a costs order against Mrs or Mr Oswal in their ordinary place of residence without considerable difficulty.
The respondent has already obtained a substantial judgment against Mrs Oswal in the proceedings heard by Gilmour J and freezing orders over all her assets (worldwide) up to a value of approximately $186 million. However, the only significant assets that are covered by the freezing orders are the subject of mortgages or assignments purportedly granted by Mrs Oswal to Mercury.
The litigation funding agreements purport to assign any amounts recovered by Mrs and Mr Oswal to Mercury. Mrs and Mr Oswal have an entitlement to share in any surplus after payment of all relevant costs and expenses. Mercury also has an entitlement to share in any such surplus which, since 31 July 2015, is equal to 60% of any such surplus. By reason of these arrangements, Mercury has a significant financial interest in the outcome of the proceedings referred to in the litigation funding agreements to which Mrs and Mr Oswal are party including the Part IVC proceedings.
The litigation funding agreements require Mercury to indemnify Mrs Oswal and Mr Oswal against any order for costs that may be made against them in the Part IVC proceedings and to pay fees, costs and charges in respect of an order for security for costs. However, there is nothing in the agreements that requires Mercury to itself provide security for the respondent's costs.
66 Ultimately, the question is how justice will be best served. On balance, I am satisfied justice will be best served by making an order for security for costs. There is a significant risk that the respondent will be unable to recover any of his costs (which will be substantial) in the event that Mrs Oswal or Mr Oswal are ordered to pay them. The risk of this occurring can be eliminated, or substantially reduced, by making an order for security in an appropriate amount. Such an order can be made in this case without risk of injustice to Mrs and Mr Oswal because, as I have said, I am satisfied that an order for security for costs in an appropriate amount will not stultify their proceedings. While this is not determinative and, indeed, may be a matter of little weight in some cases (see Green v CGU Insurance Ltd (2008) 67 ACSR 105 at [46] per Hodgson JA), I think it is an important consideration in this case.