Oswal v Commissioner of Taxation

JUDGE: GRIFFITHS J DATE OF ORDER: 2 December 2015 WHERE MADE: SYDNEY

1. The two interlocutory applications dated 18 November 2015 be dismissed.
2. The applicants are to pay the respondent's costs, as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1449 of 2015

JUDGE: GRIFFITHS J DATE OF ORDER: 2 December 2015 WHERE MADE: SYDNEY

1. The two interlocutory applications dated 18 November 2015 be dismissed.
2. The applicants are to pay the respondent's costs, as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1450 of 2015

JUDGE: GRIFFITHS J DATE OF ORDER: 2 December 2015 WHERE MADE: SYDNEY

1. The two interlocutory applications dated 18 November 2015 be dismissed.
2. The applicants are to pay the respondent's costs, as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1446 of 2015

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1449 of 2015

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1450 of 2015

JUDGE: GRIFFITHS J DATE: 2 december 2015 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 By various interlocutory applications filed on 18 November 2015, each of the applicants in three proceedings (NSD 1446 of 2015, NSD 1449 of 2015 and NSD 1450 of 2015) sought inter alia the following orders: (a) leave to appeal from orders made by Nicholas J on 5 November 2015 in which the Court ordered the applicants to pay security for the respondent's costs in relation to a tax appeal under s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) (the TAA); (b) an order pursuant to s 25(2)(e) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) that the interlocutory application for leave to appeal be heard and determined by a Full Court and that the application be heard as if on appeal and be determined at the same time as any appeal for which leave is given; and (c) an order that the orders made by the primary judge on 5 November 2015 be stayed pending the determination of the leave to appeal and the appeal from those orders.

Some background matters 2 It is desirable to set out some background matters which are relevant to the interlocutory applications as well as describe some procedural matters leading up to today's hearing. 3 The Part IVC proceedings concern tax assessments dated 22 February 2011 which were issued in respect of the 2007 taxation year. The applicant in the first proceeding before the primary judge was Mrs Oswal. Her husband, Mr Oswal, was the applicant in the second proceeding and he also commenced the third proceeding as trustee of the Burrup Trust. 4 The tax assessments are predicated upon a CGT event happening in relation to shares in Burrup Holdings Pty Ltd (BHPL) held by Mr Oswal as trustee of the Burrup Trust during the 2007 taxation year. The Part IVC proceedings have been provisionally fixed for hearing for a total of 15 days commencing on 4 April 2016 before Pagone J. 5 The Commissioner of Taxation (the Commissioner) sought orders requiring the applicants in the Part IVC proceedings to provide security for the Commissioner's costs on a joint and several basis in the amount of $2.297m. As noted above, on 5 November 2015, Nicholas J made orders which had the effect of requiring the applicants to pay a total amount of $1.2m within 28 days therefrom as security for the Commissioner's costs in the Part IVC proceedings. The applicants were also ordered to pay the Commissioner's costs of the interlocutory applications seeking security for costs. 6 As mentioned above, the applicants' interlocutory applications were filed on 18 November 2015. The applications were listed for mention before me on 25 November 2015. There was a degree of urgency because the time for providing security for costs expired on 3 December 2015. In view of the difficulties of constituting a Full Court to hear and determine the interlocutory applications before that date, the most convenient course was to list them for a hearing before me on 2 December 2015. Directions were made on 25 November 2015 to enable that to occur. 7 It is convenient to now summarise the primary judge's reasons for making the relevant orders.

Primary judge's reasons summarised 8 The primary judge noted the effect of s 177(1) of the Income Tax Assessment Act 1936 (Cth) (the ITAA), which provides that a copy of a notice of assessment is conclusive evidence of the due making of an assessment and, except in proceedings under Part IVC of the TAA the amount and all the particulars of the assessment are correct. His Honour also noted that s 14ZZR of the TAA provided that the fact that an appeal was pending in relation to a taxation decision did not interfere with the taxation decision and the tax may be recovered as if no appeal was pending. 9 The primary judge then noted that, on 9 August 2011, Gilmour J in a separate proceeding in NSD 850 of 2012 entered summary judgment against Mrs Oswal in the amount of $186,321,790.11 in favour of the Commissioner. Freezing orders which had previously been made in relation to Mrs Oswal's assets were extended. Nicholas J noted that those freezing orders as varied remained in force. 10 Nicholas J noted that the assessments the subject of the Part IVC proceedings issued to Mr Oswal were "alternative assessments" or "concurrent assessments". His Honour also noted that two preliminary questions in the Part IVC proceedings had been heard and determined by Edmonds J in Oswal v Commissioner of Taxation [2013] FCA 745 and that an application for leave to appeal against that judgment was dismissed by Foster J in Oswal v Commissioner of Taxation [2014] FCA 812. 11 Nicholas J noted the Commissioner's acknowledgment that each of the Part IVC proceedings had been brought by the applicants in good faith and that each had a reasonably arguable claim for the relief sought. 12 In respect of Mr and Mrs Oswal's assets, Nicholas J noted at [18] that they had some assets within Australia but that it was not possible to give those assets a current value. His Honour noted that Mrs Oswal is the registered proprietor of two properties in Perth and that both were encumbered by a mortgage in favour of the Oswals' litigation funder, Mercury Services Limited (Mercury). The estimated market value of these properties was approximately $45m. The validity of the mortgage to Mercury is in issue in separate proceedings before Gilmour J (see Commissioner of Taxation v Oswal (No 2) [2015] FCA 276). His Honour further noted that matters were complicated even further by the existence of other proceedings involving the Oswals and various third parties concerning disputes about beneficial interests in Mrs Oswal's properties. Those proceedings include proceedings in the Supreme Court of Victoria which the primary judge described as "complex". His Honour accepted that Mr and Mrs Oswal may have a beneficial interest in various amounts which were held in escrow when ANZ Bank sold shares owned by Mrs Oswal in BHPL (the Holdback Amount), but his Honour also commented in [23] that it appeared that any entitlement they had to receive all or part of the Holdback Amount had been assigned or purportedly assigned by them to Mercury. These and other findings made by the primary judge indicated that the applicants' assets in Australia had an uncertain value. 13 The primary judge then analysed various litigation funding agreements under which Mercury had paid in excess of $31m to various Australian law firms which have acted for the Oswals and that approximately $6m had been paid for legal services in the Part IVC proceedings. 14 Mrs Oswal's brother, Raghav Gupta, is one of three directors of Mercury and is its sole shareholder. His Honour noted that the evidence did not indicate the source of the funds used by Mercury to finance the Oswals' legal representation in the various proceedings. He also noted that the Oswals had purportedly assigned the proceeds which they might obtain from the various proceedings (including those in the Victorian Supreme Court) to Mercury pursuant to the litigation funding agreements. 15 His Honour then analysed various provisions of those agreements concerning the assignment to Mercury of various amounts as well as Mercury's specific obligations under the agreements to provide litigation funds. 16 Against those background matters, the primary judge explained why he concluded that the applicants should pay security for costs. In summary, those reasons are as follows. 17 His Honour did not accept the Oswals' submissions that: (a) they had assets in Australia which exceeded the taxation debt; and (b) in any event, the Court should disregard the taxation debt when assessing whether there was a real prospect that the Commissioner would not be able to recover his costs of the Part IVC proceedings if he was successful. 18 The primary judge noted, however, that the Commissioner had accepted that the Part IVC proceedings were reasonably arguable and that this was a matter of "considerable significance" on the Commissioner's application for security for costs. 19 His Honour then considered the applicants' argument that the Court lacked power to make an order for security for costs against a taxpayer in proceedings to have a tax assessment set aside because the effect of such an order would be to impose an "incontestable tax", which would be unconstitutional. His Honour rejected that contention, essentially for the following reasons: (a) the provisions of Part IVC of the TAA permit a taxpayer to challenge a tax assessment, including in the Federal Court, which satisfies the constitutional requirement that a tax not be made incontestable (citing Commissioner of Taxation v Futuris Corporation Limited [2008] HCA 32; (2008) 237 CLR 146 (Futuris) per Gummow, Hayne, Heydon and Crennan JJ and Deputy Commissioner of Taxation v Brown [1958] HCA 2; (1958) 100 CLR 32 (Brown) at 40 per Dixon CJ); (b) the applicants have commenced Part IVC proceedings and have continued to prosecute them and, once that judicial process has been engaged, it is for the Court to exercise its powers in the ordinary way, including its power to order security for costs; and (c) his Honour analysed Hill J's decision in Fletcher v Commissioner of Taxation [1992] FCA 586; (1992) 37 FCR 288 (Fletcher) where, without doubting that the Court had power to order security for costs in a Part IVC proceeding, discretionary considerations weighed heavily in favour of not doing so against a natural person, but concluded that his approach was not inconsistent with Fletcher if the choice between the Administrative Appeals Tribunal (AAT) and the Court was viewed as a "neutral consideration" (at [50]). 20 The primary judge then considered the applicant's argument that security for costs should not be ordered against them because, in substance, they were in the position of defendants. His Honour noted the applicants' reliance on the following passage from Dixon J's judgment in Willey v Synan [1935] HCA 76; (1935) 54 CLR 175 (Willey) at 184 (with whom Rich J agreed): 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 an order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action. 21 After referring to the observations of Allsop CJ and Middleton J in Madgwick v Kelly [2013] FCAFC 61; (2013) 212 FCR 1 (Madgwick) at [16] concerning that passage from Dixon J's judgment and the reference therein to a statement of Scrutton L J in Maatschappij voor Fondsenbezit v Shell Transport and Trading Co [1923] 2 KB 166 at 177, the primary judge concluded that the Court was not required to undertake a minute analysis of the relevant legal relationship between a party seeking an order for security and a party resisting such an order. Nor, his Honour found, was a Court required to take "a binary view of the question whether the applicants are, in substance, defendants or plaintiffs". Emphasis was given to the breadth of the discretion to order security for costs under s 56 of the FCA Act and r 19.01(1) of the Federal Court Rules 2011 (the FCRs). His Honour considered that the preferable approach was to assess the extent to which the applicants' proceedings might "reasonably be characterised as defensive" and, if they could be characterised as having at least a defensive element, this might weigh against making an order for security for costs (see at [53]). 22 Although noting that the Part IVC proceedings involved the applicants invoking the Court's jurisdiction to challenge the validity of the tax assessments, the primary judge stated that he viewed the proceedings as having "a significant defensive element". 23 The primary judge then turned his attention to the relevance of the fact that the party against whom security for costs is sought is a natural person, is ordinarily resident out of the jurisdiction and has no assets in the jurisdiction. In that context, his Honour discussed some relevant caselaw, including observations of McHugh J in P S Chellaram & Co v China Ocean Shipping Co [1991] HCA 36; (1991) 102 ALR 321 at 323 and the observations of Gummow J in Energy Drilling Inc v Petroz NL (1989) ATPR 40-954 at 50,422. 24 His Honour noted that the United Arab Emirates, where the Oswals currently resided, was not a country which was referred to in the Schedule to the Foreign Judgments Regulations 1992 (Cth) (the FJRs) and, accordingly any costs order obtained by the Commissioner could not be enforced against the Oswals in that country without considerable difficulty. 25 The primary judge found that Mercury was not obliged by the terms of the litigation funding agreements to provide security for costs, however, he also observed that there was no evidence to suggest that Mercury was either unable or unwilling to provide the applicants with sufficient funds to comply with an order for security for costs against either of them. 26 His Honour referred to a letter dated 21 May 2015, which was written by Mercury's Australian solicitors to the applicants' solicitors, which raised the possibility of Mercury seeking to terminate the litigation funding agreements. However, his Honour found at [63] that the letter did not address the issue of security for costs and appeared to be directed to the issue of the validity of the assignments purportedly affected by the agreements. That was not an issue in the Part IVC proceedings. 27 His Honour inferred from the fact that Mercury had already paid some $31m to the applicants' lawyers 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" and that there was no evidence to the contrary. Accordingly, his Honour concluded that he was satisfied that an order for security for costs in an appropriate amount would not stultify the Part IVC proceedings. 28 After noting that all relevant facts and circumstances had to be weighed in considering the proper exercise of the discretion to order security for costs, the primary judge set out in [65] of his reasons for judgment the matters to which he gave particular weight, which were 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. 29 The primary judge's ultimate conclusion as to why he considered that an order for security for costs should be made is set out at [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. 30 The primary judge then turned his mind to the appropriate quantum of the security and, after making various reductions on the amount sought by the Commissioner, he determined that the applicants should pay a total amount of $1.2m within 28 days.

(a) Some relevant principles concerning leave to appeal 31 Unsurprisingly, there was no dispute regarding the relevant principles to apply in considering whether to grant the applicants leave to appeal against Nicholas J's orders. Those principles are authoritatively established in Full Court authorities such as Décor Corp Pty Ltd v Dart Industries Inc [1991] FCA 844; (1991) 33 FCR 397 and Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238 (Samsung). Some of the principles are set out in Samsung at [26]-[29]: 26 In this Court, it is well established that the relevant test (or 'litmus test') for whether leave to appeal from an interlocutory judgment will be granted, comprises the following two integers: (1) Whether, in all the circumstances of the case, the decision is attended by sufficient doubt to warrant its being reconsidered by the Full Court; and (2) Whether substantial injustice would result if leave were refused supposing the decision to be wrong. (Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398-400). 27 In Bienstein v Bienstein (2003) 195 ALR 225 at [29] (p 231), McHugh, Kirby and Callinan JJ said that: The principles that govern the grant of leave to appeal are well established. An applicant for leave must establish that the decision in question is attended with sufficient doubt to warrant the grant of leave. The applicant must also show that substantial injustice will result from a refusal of leave to appeal. 28 The test for leave to appeal explained by the High Court in Bienstein v Bienstein is the same test as the Full Court had earlier articulated in Décor. 29 As the Full Court itself said in Décor, the test which it described is appropriate for the general run of cases. The test should not, however, be applied as if it were some hard and fast rule. Each case must be considered on its merits. 32 In Samsung, the Full Court discussed the different ways in which the question of leave might be approached depending upon the practical effect of the orders the subject of the leave application. The Full Court stated that leave is more likely to be granted where the practical effect of the relevant order is finally to determine the parties' rights. If, however, the order is concerned with matters of practice and procedure, it is less likely that a stay will be granted unless matters of principle are involved. 33 It is well established that a court should exercise restraint in determining whether to grant leave in respect of matters of practice and procedure. That point was emphasised recently by Flick J in Waters v Commonwealth of Australia (Australian Taxation Office) [2015] FCAFC 46 (Waters) at [8], noting also that these observations were made in the context of an application for leave to appeal from a decision to order security for costs (emphasis in original): In respect to interlocutory decisions affecting matters of practice and procedure it is further recognised that "if a tight rein were not kept upon interference with the orders of Judges of first instance, the result would be disastrous to the proper administration of justice": Re the Will of F B Gilbert (1946) 46 SR (NSW) 318 at 323 per Jordan CJ. The Chief Justice there went on to observe that if a "tight rein" were not so exercised the "disposal of cases could be delayed interminably, and costs heaped up indefinitely, if a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in Chambers to a Court of Appeal". Appl'd: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 177 per Gibbs CJ, Aickin, Wilson and Brennan JJ; National Mutual Holdings Pty Ltd v Sentry Corp (1988) 19 FCR 155 at 161 per Bowen CJ, Woodward and Lockhart JJ. The risk to the proper administration of justice is not only posed by those with "a long purse". In respect to decisions involving the exercise of a discretionary judgment, a Court will not intervene unless there is some error of the kind identified in House v R (1936) 55 CLR 499, 10 ALJR 202. Appl'd: Welsh v Digilin Pty Ltd [2008] FCAFC 149 at [16], (2008) 250 ALR 13 at 19 per Tamberlin, Greenwood and Collier JJ. 34 Another relevant principle which guides the consideration and determination of an application for leave to appeal is the need to draw a distinction between such an application and the hearing of the appeal itself. As the Full Court noted in Samsung Electronics Co Ltd v Apple Inc [2013] FCAFC 138 at [50]: It is also of importance to recall that applications for leave to appeal should not be transformed without good reason into de facto appeals. An application for leave should thus not be conducted as though it is a preliminary hearing of the appeal itself: Food Channel Network Pty Ltd v Television Food Network GP [2009] FCA 1446 at [26]. 35 In Food Channel Network Pty Ltd v Television Food Network GP [2009] FCA 1446 at [26], Reeves J stated: … a court should be careful to avoid converting a leave application of this kind into a preliminary hearing of the appeal. I should therefore avoid making any detailed analysis of the issues raised, or expressing any concluded views on them. I consider my assessment of the issues should be more akin to the "rough and ready" approach suggested by Brennan CJ and McHugh J in Jackamarra v Krakouer (1998) 195 CLR 516 at [9]. 36 The applicants contended that the orders of the primary judge were attended by sufficient doubt to warrant them being reconsidered because of the following three primary contentions: (a) the primary judge should have found that the Part IVC proceedings were wholly defensive and that the applicants were in substance in the position of defendants/ respondents; (b) accordingly, the primary judge should have held that, having regard to the subject matter, scope and purpose of s 56 of the FCA Act, no security for costs order should have been made; and (c) this conclusion is reinforced by Constitutional considerations and the requirement that a taxpayer must be entitled to contest a taxation assessment in a Chapter III Court. 37 The applicants contended that their submissions raised a substantive issue of general importance and was not simply a question of practice and procedure. Furthermore, they contended that substantial injustice would result if leave to appeal were refused because they would be stultified in pursuing their Part IVC proceedings. They contended that there is injustice where a party is required to provide security for costs of a significant amount where that party is not properly liable to provide security. 38 I accept the Commissioner's submission that the discretion conferred by s 56 of the FCA Act and by r 19.01 of the FCRs to order security for costs is broad and substantially unfettered. The fundamental requirement is that the discretion be exercised judicially and by reference to the particular circumstances of each case (see, for example, Madgwick at [6] per Allsop CJ and Middleton J). 39 It is convenient to deal with each of the applicants' primary three contentions in turn, noting the observations made above regarding the need to distinguish between the hearing of an application for leave to appeal and the hearing of a substantive appeal itself.

The applicants are in substance defendants 40 The applicants contended that the Court had no power to order security for costs in circumstances where a party against whom the order is made is, in substance, a defendant. In support of that contention, the applicants primarily relied upon Willey and Sundberg J's decision in Aquatown Pty Ltd v Holder Stroud Pty Ltd [1995] FCA 939 (AustLII citation [1995] FCA 1667); (1995) 18 ACSR 622 (Aquatown). 41 For the following reasons, I consider that Willey does not assist the applicants' claims. In that case, the plaintiff sailor found on board the ship of which he was a crewmember on a voyage from New Zealand to Australia English silver coins totalling approximately £350. Customs took possession of the coins and the plaintiff made a claim under s 207 of the Customs Act 1901-1934 (Cth) for their return. In accordance with the relevant legislation, Customs gave the plaintiff notice requiring him to commence an action to recover the coins or, in default, the coins would be forfeited. The plaintiff, who was not ordinarily resident within Australia, commenced an action for the recovery of the coins and Customs sought security for costs. The High Court held that, by reason of the requirement that the plaintiff commence proceedings to avoid statutory forfeiture, the plaintiff was, in substance, in the position of a defendant and security for costs should not be ordered. The relevant principle was expressed by Dixon J at 184 as follows: 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 address, he may be ordered to give security, although he becomes a defendant in the action… The principle was considered in Maatschappij voor Fondsenbezit v Shell Transport and Trading Co, where a number of illustrative cases are collected in the judgment of Scrutton LJ. He said: "The position, I think, extends to every case where the person against whom security is sought is really defending him against attach, even if he be nominally a plaintiff, but really defending himself against defendants' previous action against him. 42 I accept the Commissioner's submission that Willey is not authority for the principle that the Court is necessarily prevented from ordering security for costs from a plaintiff who is in substance a defendant. It is evident from both the summary of the appellant's argument in that case, as well as in the judgment of Latham CJ, that no such submission was made to the Court. 43 The correct principle is reflected in the following passage from Jacobson J's judgment in Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Limited (In Liq) [2003] FCA 803 at [82]: In any event, the question of whether the proceedings are in truth defensive is merely a factor to be taken into account. It seems to me that the position was correctly stated in the decision of Zeeman J in Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186. As his Honour said in the following passage at 189:- The general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order. In other such cases, to require security, if not oppressive, would be quite inappropriate by reference to the justice of the case. I refer to the discussion in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289; 11 ACLR 616 at 624-9 and in Interwest Ltd v Tricontinental Corporation Ltd (supra) at ACLC 1228-30. 44 In my view, there is insufficient doubt that the primary judge erred in the approach he took to this matter, which is consistent with that of Jacobson J. His Honour found that the proceedings had "a significant defensive element" but he did not view that issue as determinative. Rather, he viewed it as one of several considerations which needed to be weighed in the balance. That approach is not inconsistent with Willey. Nor is the position affected by Sundberg J's decision in Aquatown. That case involved an application to set aside a statutory demand. In an obiter observation, Sundberg J indicated at 626 that the principle in Willey applied "and that the fact that a plaintiff/applicant has been forced into litigation so as to be a true defendant is more than a matter to be taken into consideration in exercise of the discretion whether to require security". His Honour apparently had in mind that the plaintiff there had been "forced into litigation" so as to avoid the presumption of insolvency in an application to wind up the plaintiff company. That is far removed from the position here, where the applicants had the choice of challenging the assessments in either the AAT (where there is no power to order costs) or in the Court. 45 It is not clear that Sundberg J held in Aquatown that there was simply no power to order security for costs where a plaintiff is, in substance, in the position of a defendant. If, on the correct construction of his Honour's obiter observations set out immediately above, he did so, that is inconsistent with a long line of authority to the contrary in both this Court and other courts. That caselaw includes Reinsurance Australia; Madgwick (see further below); K P Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 at 198 per Beazley J and Putney Group Pty Limited v The Royal Rehabilitation Centre Sydney [2009] NSWSC 424 at [40]. In the latter case, Forster J expressly rejected the proposition that a party who is in substance the "attacker" is necessarily prevented from obtaining an order for security for costs. 46 The primary judge's approach to this factor is consistent with that adopted by Allsop CJ and Middleton J in Madgwick at [16]-[18]. Their Honours agreed with the approach taken by the primary judge in that case, which was to ask whether, in substance, the proceedings were to a significant degree defensive. Moreover, their Honour stated that it was a legitimate factor to weigh alongside other relevant factors that an applicant is, in effect, a defendant. In other words, the factor was not determinative of the question whether or not security for costs should be granted. The decision in Madgwick is binding. 47 In their closing address in reply, the applicants drew the Court's attention to two other cases. The first is the judgment of French J (as his Honour then was) in Olbers Co Ltd v Commonwealth of Australia [2002] FCA 1269, in which his Honour drew attention to the two views on the matter but did not find it necessary to resolve the question whether Sundberg J's view was correct. 48 The second case is the more recent decision of Foster J in Aurora Networks Pty Ltd v Halbedl; In the Matter of Aurora Networks Pty Ltd [2013] FCA 632 (Aurora Networks) in which his Honour applied Sundberg J's decision. In my view, this does not advance the applicants' case for leave to appeal in circumstances where Aurora Networks predates Madgwick and, moreover, as is evident from [19] of Foster J's reasons, his Honour's attention was not drawn to any of the long line of authorities which are inconsistent with Sundberg J's view. 49 There is insufficient doubt that the primary judge's approach to this issue was incorrect so as to warrant a grant of leave.

The constitutional question 50 In accordance with the requirements of s 78B of the Judiciary Act 1903 (Cth), notices were given below which described the constitutional issue in the following terms (emphasis added): The constitutional issue involved in these proceedings is whether a Court in tax proceedings under Part IVC of the [TAA] may order dismissal of proceedings on non-payment of security for costs in circumstances where a taxpayer's right 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. 51 As the Commissioner pointed out, the s 78B notices which were then distributed shortly prior to the hearing of the applications for leave to appeal identified the constitutional issue in the following different terms (emphasis added): The constitutional issue involved in these proceedings is whether the Federal Court of Australia, in an appeal pursuant to s 14ZZ(1)(a)(ii) under Part IVC of the [TAA], may order security for costs and a stay or dismissal of the proceedings on non-payment, in circumstances where a taxpayers right 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. 52 The primary judge rejected the applicants' case that the effect of making an order for security for costs in Part IVC proceedings was to render the tax incontestable. For the following reasons, the applicants have not demonstrated sufficient doubt in the correctness of his Honour's rejection of that claim. 53 I did not understand the Commissioner to dispute the essential proposition that, for constitutional reasons, a tax must not be incontestable. It would be difficult to do so, not the least having regard to Dixon CJ's observations in Brown at 40: Although there is no judicial decision to that effect, it has, I think, been generally assumed that under the Constitution liability for tax cannot be imposed upon the subject without leaving open to him some judicial process by which he may show that in truth he was not taxable or not taxable in the sum assessed, that is to say that an administrative assessment could not be made absolutely conclusive upon him if no recourse to the judicial power were allowed. This is not the occasion to go into the basis of this view. (See also Futuris at [80] at per Kirby J and MacCormick v Federal Commissioner of Taxation [1984] HCA 20; (1984) 158 CLR 622 at 639-640 per Gibbs CJ, Wilson, Deane and Dawson JJ). 54 As the Commissioner pointed out, the way in which the applicants now presented the constitutional point focuses upon the proposition that the possible dismissal of a Part IVC proceeding for failure to satisfy an order to provide security for costs is contrary to a taxpayer's entitlement to engage in Part IVC proceedings. I accept the Commissioner's submission that the applicant's case misconceives the concept of an "incontestable tax". That is because, as the primary judge found: (a) the constitutional requirement is that the taxpayer be provided with a judicial process to challenge an assessment and, as the High Court found in Futuris, Part IVC of the TAA provides a taxpayer with "recourse to the judicial power"; and (b) in circumstances where a taxpayer chooses to take advantage of that judicial process (as opposed to appealing to the AAT), a wide range of procedural matters may arise in the exercise of judicial power, including the possible making of an order for security for costs under s 56 of the FCA Act. 55 The applicants have not established that there is sufficient doubt in the primary judge's analysis and rejection of their constitutional argument, including his Honour's analysis of Hill J's decision in Fletcher.

Primary judge's exercise of discretion and unreasonableness 56 This aspect of the applicants' case is predicated on the rejection of their earlier contention that there is simply no power to award security for costs where a party is in substance a defendant. Assuming that there is power to make such an order against a taxpayer in Part IVC proceedings, the applicants contended that it would require "special circumstances" for the power to be exercised, citing Fletcher. They further contended that the fact that they are resident outside the jurisdiction and have litigation funders are not "special circumstances" and if the primary judge exercised his discretion on that basis, he fell into error in the sense in House v R [1936] HCA 40; (1936) 55 CLR 499 (House) at 505-506. Further, they submitted that "it was unreasonable, in the sense described in Li, for Nicholas J to fail to give any weight to the wholly defensive nature of Part IVC proceedings". 57 For the following reasons, these submissions do not cast sufficient doubt on the correctness of the primary judge's judgment or orders. First, there is no warrant for reading into the discretion under s 56 of the FCA Act a requirement that there be "special circumstances" before security for costs will be ordered in the context of Part IVC proceedings. Although that expression was used by Hill J in Fletcher at 291, he did so in the context of the exercise of a right of appeal to the Court on a decision on a question of law by the AAT. Even more significantly, at that time, the relevant Federal Court Rules concerning security for costs required the existence of "special circumstances" (order 53, rule 8). I do not accept the applicants' submissions that Hill J intended to create a precondition of "special circumstances" to the exercise of the discretion under s 56 which was different in content or operation from the express requirement that there be "special circumstances" under the then Rules. 58 Secondly, the applicants' reliance on Minister for Immigration and Citizenship v Li [2013] HCA 18; (2013) 249 CLR 332 (Li) is misplaced. That case involved judicial review for jurisdictional error of a decision of the Migration Review Tribunal. As the applicants acknowledged, the relevant principles to be applied in the proceeding here, which involve applications for leave to appeal against orders made by a primary judge in the exercise of his discretion, are those set out in House. Having regard to the reasons which are clearly and comprehensively set out by the primary judge as underpinning his conclusion that there should be an order for security for costs in the particular circumstances here, there is no proper basis to argue that the decision was unreasonable in the sense of lacking "an evident and intelligible justification" (Li at [76]). 59 Thirdly, and in any event, the applicants' contention that Nicholas J failed to give any weight to the defensive nature of Part IVC proceedings is unsustainable. His Honour plainly did view that as a relevant matter as is evident from [53]-[54] of his reasons for judgment, where he described such proceedings as having "a significant defensive element". That matter is the first matter which is identified in [65] of the reasons for judgment, which lists all the matters to which the primary judge gave "particular weight" (see [28] above). I am not persuaded that there is sufficient doubt in the correctness of the primary judge's finding that there is a significant defensive element in Part IVC proceedings, as opposed to them being "wholly defensive". Ms Seiden SC, who appeared with Ms Kaur-Bains for the applicants, candidly acknowledged that that precise term had not been used by the applicants in the case which was presented on their behalf below. Rather, she said that the case was presented on the basis that, in substance, the applicants were in the position of defendants.

(b) Some relevant principles concerning stay orders pending an appeal 60 There was no dispute between the parties regarding the correct approach in the exercise of the Court's discretion under s 23 of the FCA Act and r 36.08 of the FCRs to stay orders pending an appeal. They are set out in cases such as Powerflex Services Pty Ltd v Data Access Corporations [1996] FCA 460; (1996) 67 FCR 65; Alexander v Cambridge Credit Corp Ltd (1985) 2 NSWLR 685; Deputy Commissioner of Taxation v Ansett Resources & Industries Pty Ltd [2010] FCA 833; Citrus Queensland Pty Ltd v Sunstate Orchard Pty Ltd [2008] FCA 1867 and Coshott v Prentice [2013] FCA 1036. 61 Nor was it seriously disputed that if the Court found that the primary judge's orders were not attended by sufficient doubt so as to warrant the grant of leave to appeal, this necessarily meant that no stay should be granted and there would be no need to consider the balance of convenience. 62 The applicants contended that, if there was no stay, the Part IVC proceedings will be "stultified". That contention is inconsistent with the primary judge's finding in [64] that an order for security for costs in an appropriate amount would not stultify the proceedings. That finding was reasonably open to be made having regard to the fact that Mercury had already paid $31m to lawyers in various proceedings, including $6m in the Part IVC proceedings. His Honour drew an inference that Mercury had access to substantial funds to conduct the proceedings including, if necessary, to cover security for costs which the Oswals were unable to pay personally. It should also be noted that the applicants' draft notice of appeal does not include any ground which challenges these findings. This was a matter which formed part of the basis for the ruling on evidence which upheld the Commissioner's objection to the applicants adducing fresh evidence on this subject. The reasons for that ruling are recorded in the transcript. 63 Finally, on the issue of prejudice to the applicants and balance of convenience if a stay is not granted, it is important to note that the primary judge's order requiring the applicants to pay security for costs is not self-executing on default. If the primary order is not complied with, the Commissioner must decide whether or not he will apply to have the proceedings dismissed. Whether he will do that and what the outcome of any such application might be are unknown and uncertain at this stage. Accordingly, any prejudice to the applicants is contingent upon those matters. 64 No proper basis has been established to warrant an order staying the primary judge's orders.

Conclusion 65 For these reasons, I am of the opinion that the primary judge's judgment and orders are not attended by sufficient doubt to warrant the grant of leave to appeal, nor has any basis been established for granting a stay of those orders. The two interlocutory applications in each proceeding should be dismissed, with costs. Orders will be made accordingly. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.