PAUL BURNESS (AS LIQUIDATOR) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA; COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v KEITH WILLIAM SMITH and STEPHEN SMITH

REASONS FOR JUDGMENT 1 By Order of the Federal Court dated 13 July 2005, Denward Lane Pty Ltd (ACN 065 418 411), ("the Company"), was wound up, and Paul Burness was appointed liquidator of the Company. The relation-back date for the Company is 19 April 2005, being the date on which the Commissioner of Taxation of the Commonwealth of Australia commenced the proceedings to wind up the Company. 2 On 8 April 2008, Paul Burness (as liquidator of the Company) ("the Plaintiff"), filed an application in this Court, together with a supporting affidavit, against the Commissioner of Taxation of the Commonwealth of Australia ("the Defendant"), pursuant to ss 588FA and 588FC of the Corporations Act 2001 (Cth) ("the Act"), seeking an order that the Defendant pay to the Company the sum of $74,142.22, together with interest and costs. 3 The Plaintiff's supporting affidavit explained that after examining the financial records of the Company, he prepared a Report and Analysis of Solvency ("the Report"). A copy of the Report was an exhibit to that affidavit. The Report stated in part that: Our investigations lead us to believe that the Insolvency Date [the suspected date that the [C]ompany either (a) first became insolvent or (b) a date that the [C]ompany was insolvent, even if not the first that the [C]ompany was insolvent, was] … 30 June 2004 … 4 The Report went on to state that because the liquidator could prove that the Company was insolvent by no later than 30 June 2004, pursuant to s 588E(3) of the Act the Company should therefore be presumed to be insolvent from 30 June 2004 until the relation-back date of 19 April 2005, making transfers by the Company during that period potentially voidable. In particular, the supporting affidavit identified two payments made by cheque by the Company to the Defendant during the extended relation-back period: 1. cheque number 6720, presented for payment on 22 October 2004 in the sum of $43,250.00; and 2. cheque number 6823, presented for payment on 26 November 2004, in the sum of $30,892.22. 5 The Plaintiff's supporting affidavit further stated, by reference to the Report, that each of the payments: 1. resulted in the Defendant receiving from the Company, in respect of an unsecured debt of the Company owed to the Defendant, more than the Defendant would have received from the Company in respect of its debt if the payment were set aside, and the Defendant was to prove for the debt in the winding-up of the Company; 2. was made at a time when the Company was insolvent; 3. was made at a time when the Defendant should have known that the Company was insolvent; and 4. was made during the extended relation-back period. 6 Accordingly, as I noted previously, the Plaintiff claimed each of the payments was voidable pursuant to s 588FE of the Act. 7 On 2 June 2008, the Plaintiff filed points of claim consistent with the Plaintiff's affidavit. Further particulars were provided to support the matters identified in paras [4] and [5] above. The Defendant filed points of defence and filed an interlocutory process against Keith William Smith and Stephen Smith ("the Respondents") seeking, inter alia, an Order pursuant to s 588FGA(4) of the Act, that the Respondents pay to the Defendant the amount of $45,947.46, together with interests and costs, being the amount of the Defendant's loss and damage resulting from any Order the Court might make against the Defendant under s 588FF of the Act. 8 An affidavit in support of that interlocutory process sworn by Larissa Astrid Strzadala was filed on 20 June 2008. In that affidavit, Ms Strzadala deposed to the fact that the sum of $45,947.46 constituted payment in discharge or partial discharge of debts owing by that Company to the Defendant in respect of withholding amounts under Subdiv 16-B of Sch 1 to the Taxation Administration Act 1953 (Cth). Further, the affidavit deposed that if the Court made an Order under s 588FF of the Act, then the Respondents were liable to indemnify the Defendant in respect to any loss or damage to the extent of the sum just identified, together with interest and costs. 9 Service of the interlocutory process against the Respondents was effected on 20 June 2008 by service on White Cleland solicitors, who at that time acted for the Respondents. On 7 July 2008, the parties agreed to Orders dealing with the interlocutory steps for the management of the proceedings (including the interlocutory process). Subsequent Orders were made extending the time for compliance with those Orders. On 26 September 2008, the proceedings came back before me for directions. At that time the Respondents had failed to comply with the Orders previously made, including Orders for discovery, and on that day I ordered: 1. By 4:00pm on 10 October 2008, the Respondents file and serve any material upon which they intend to rely at trial, whether by way of statement of case and/or affidavit. 2. Pursuant to Order 72 of the Federal Court Rules, the proceeding be referred to mediation by a Registrar of the Court, such mediation having been set down for 15 October 2008 at 10:00am. In the event that the matter does not settle at the conclusion of the initial mediation, the Registrar conduct a case management conference immediately following the mediation to consider the most economic and efficient means of bringing the proceedings to trial, and of conducting the trial, at which conference the Registrar may give further directions. The mediator is to report the result of the mediation/case management conference to the Court by 16 October 2008. 3. The Commissioner serve on the Respondents: (a) a copy of this order; and (b) a copy of the transcript - by sending the same to the Respondents at their last known address and serving a copy on their current solicitors. 10 The Defendant complied with the Order and the Respondents were served with the identifying materials in the manner specified in the Order. However, the Respondents again failed to comply. 11 On 15 October 2008, the proceeding was mediated with the assistance of Deputy Registrar Luxton. The Respondents did not attend the mediation. At the conclusion of the mediation, Registrar Luxton made Orders that: 1. The defendant file any notice of motion seeking final orders in the proceeding, and supporting affidavits, by 17 October 2008. 2. The defendant serve the notice of motion and supporting affidavits on Keith William Smith and Stephen Smith by posting the documents, together with a sealed copy of this order, to them at 7 Woodbyrne Crescent, Mornington, Victoria 3931 as soon as is practicable. 3. The notice of motion be returnable before a Judge on 30 October 2008 at 9:30 a.m. 4. Costs be reserved. 12 The Defendant complied with those directions, as evidenced by an affidavit sworn by Christopher Hallinan on 3 November 2008. On 17 October 2008, consistent with the directions made by Registrar Luxton, the Defendant filed a notice of motion for judgment on default, accompanied by an affidavit sworn by Douglas Eagleton, an officer employed in the Legal Services Branch of the Defendant. That affidavit stated in part: [21]. I refer to the affidavit of Paul Andrew Burness sworn in support of the Plaintiff's originating process on 4 April 2008 and filed herein. On the basis of the material provided in the affidavit together with review of some of the Plaintiff's discovered documents, the Defendant is satisfied that the Plaintiff can prove his claim. [22]. On that basis, the Plaintiff and Defendant have agreed in principal to settle the proceeding on the basis that the Defendant pay the Plaintiff the primary amount of the claim of $74,142.22 together with interest in the amount of $6,041.61 in full and final settlement of the claim. 13 The affidavit went on to explain the calculation of judgment interest resulting in the amount specified of $6,041.61. In addition, the affidavit of Mr Eagleton deposed to the fact that a precondition to the settlement was that the Respondents be afforded every opportunity to be subrogated to any defence the Defendant was able to raise in the proceedings, and provided that they failed to do so, the Court would make Orders that (1) pursuant to s 588FF(1)(a) of the Act that the Defendant pay the sum of $80,156.83 to the Company; and (2) pursuant to s 588FGA(4) of the Act that the Respondents pay the sum of $49,691.44 to the Defendant. (The affidavit explained that because the indemnity sought represented some 62% of the claim made by the Plaintiff against the Defendant, the total indemnity sought from the Respondents represented the base amount of $45,947.46, plus 62% of the $6,041.61 interest ($3,743.98) for which the Defendant was liable on the Plaintiff's claim.) 14 The Defendant in its notice of motion also sought Orders that there be a stay of execution of 45 days from the date of service of the original sealed Orders, and that there be no Order as to costs between the parties. 15 The rules governing judgment on default are found in O 35A rr 2(2) and 3(2) of the Federal Court Rules 1979 (Cth). So far as is presently relevant, those rules provide that: 2(2) For this Order, a respondent is in default if the respondent has not satisfied the applicant's claim and: (a) the time for the respondent to enter an appearance has expired and the respondent has failed to enter an appearance; or (b) the time for the respondent to file a defence has expired and the respondent has failed to file a defence; or (c) the respondent fails to attend a directions hearing; or (d) the respondent fails to comply with an order of the Court in the proceeding; or … 3(2) If a respondent is in default, the Court may: … (c) if the proceeding was commenced by an application supported by a statement of claim or the Court has ordered that the proceeding continue on pleadings - give judgment against the respondent for the relief that: (i) the applicant appears entitled to on the statement of claim; and (ii) the Court is satisfied it has power to grant; or (d) given judgment or make any other order against the respondent; or (e) make an order specified in paragraph (b), (c) or (d) to take effect if the respondent does not take a step ordered by the Court in the proceeding in the time limited in the order. Subrule 5 goes on to provide that: (5) The Court may make an order of the kind mentioned in subrule (1), (2) or (4), or such other order, or may give such directions, and specify such consequences for non-compliance with the order, as the Court thinks just. 16 The requirement in O 35A r 3(2) that the applicant (in this case the Defendant) appear to be entitled to the relief on the interlocutory process does not require proof by way of evidence of the claim. It requires an assessment of the claims pleaded to ascertain whether or not there is a cognisable claim for relief (i.e. a claim is stated and the Court has jurisdiction to grant the relief sought): see e.g. Arthur v Vaupotic Investments Pty Ltd [2005] FCA 433; Chanel Limited v Kim [2008] FCA 477 and Nokia Corporation v Yu (No 2) [2008] FCA 1088 at [8]. 17 Notwithstanding that O 35A r 3(2) does not require the Defendant to file and serve proof by way of evidence in order for judgment on default to be granted, I should note that in this case it is apparent, both on the face of the interlocutory process and from the affidavit material filed and served on the Respondents, that there is evidence that would justify and warrant the default judgment now sought. 18 That brings me to the application of O 35A. The Respondents have not filed a defence or any affidavit material in support of a claim that they should not be held accountable under s 588FGA of the Act. Moreover, neither of the Respondents has appeared at the directions hearings or has complied with any of the other interlocutory Orders that I have earlier referred to. As a result, the Respondents are in default for the purposes of O 35A. 19 In the circumstances, I consider both that the allegations in the interlocutory process are made out and that it is appropriate for there to be relief of the kind, although not completely of the kind, sought in the interlocutory process. In addition to the Orders referred to above, the Defendant also sought, in the alternative, a declaration of the Defendant's entitlement to be indemnified by the Respondents. In the circumstances, I do not propose to grant the declaration sought by the Defendant. As Jessup J said in Review Australia Pty Ltd v Lifestyle Investments Pty Ltd [2008] FCA 74 at [57]: I can see no point in making a declaration. The applicant has been successful in its action for damages, and the basis of that success appears sufficiently from these reasons. In my view, a declaration would not add further to the appropriate judicial resolution of the dispute which has brought the parties to court. 20 The same is true here. It is neither necessary nor appropriate to make a declaration because the Defendant has been successful in its application for indemnification, the basis for that success is apparent in these reasons, and a declaration would not add further to the resolution of the dispute. Indeed, the Defendant's interlocutory process itself, by couching the request for the declaration in the alternative, appears to implicitly recognise this reality. Accordingly, I will grant relief and make Orders in the following terms: 1. Pursuant to s 588FF(1)(a) of the Corporations Act 2001 (Cth) ("the Act"), the Defendant pay the sum of $80,156.83 to Denward Lane Pty Ltd (in liquidation) (ACN 065 418 411) within 45 days of service of the sealed copy of these Orders on the Defendant. 2. Pursuant to s 588FGA(4) of the Act, the Respondents pay the sum of $49,691.44 to the Defendant within 45 days of service of a sealed copy of these Orders on the Respondents, such service to be effected by posting a sealed copy of the Orders to the Respondents at 7 Woodbyrne Crescent, Mornington, Victoria, 3931. 3. There be no Order as to costs. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.