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.