Plaintiff v Defendant

2 Guarantees to the value of $10,137,770.56 had been provided as security together with cash in the sum of $14,077,810.31. The security had been ordered in respect of some, but not all, of the amounts claimed by Puffin in notices of demand served on AED Oil under the charge. The notices were served on AED Oil, as guarantor of the obligations of AED Services Pte Ltd, a wholly owned subsidiary, under a Charter Contract dated March 2006 (as amended and restated on 17 May 2007) made between AED Services and Puffin. The Charter Contract set out the terms under which the 'Front Puffin', a floating production, storage and off-loading vessel (FPSO), was leased and chartered by Puffin to AED Services for deployment in an oil field located in the South Timor Sea.

3 Security, required as a condition of the injunction, had been confined to an amount referrable to Puffin's claimed liability for Goods and Services Tax and unpaid invoices. Puffin had also sought security in respect of a further claim based on an estimate of its income tax liability for the financial years ended 30 June 2008 and 30 June 2009. The tax claims were based on provisions of the Charter Contract under which AED Services was obliged to indemnify Puffin for certain tax liabilities.

4 The basis for AED Oil's application for a variation of the conditions and the release of the guarantees and cash, was its contention that the express purpose for which the security was provided had been satisfied or that Puffin no longer maintained a relevant claim to the 'unpaid invoices'.

5 On 28 January 2011, Puffin issued a cross-summons by which it sought an order discharging the injunction. If that were to occur, all security would be returned to AED Oil. Puffin's primary application for discharge seemed predicated on the assumption that AED Oil was entitled to have returned to it so much of the security as was attributable to Puffin's GST liability. Alternatively, if the injunction was to continue to inhibit Puffin from exercising its rights under the charge, Puffin sought the introduction of a new condition requiring AED Oil to pay into court an amount calculated by reference to Puffin's estimation of its income tax liability. The basis for Puffin's application, shortly stated, was there had occurred a material adverse change in the cash position of AED Oil since the injunction was granted, and that AED Services had failed to act reasonably in the preparation and submission to Puffin of income tax returns in a form satisfactory to Puffin.

6 In addition to security provided by AED Oil, the parties gave cross-undertakings to facilitate and expedite the preparation and filing of income tax returns. Upon the filing of income tax returns, Puffin's liability for income tax would crystallise and there would have been no uncertainty about the amount of its tax liability and thus the extent of any liability of AED Services and AED Oil under the indemnity.

7 Following the application for an injunction in August 2009, AED Oil and AED Services, which was joined as a defendant to counterclaim, applied to stay the whole proceeding in favour of resolution by arbitration pursuant to the Charter Contract. The application was refused at first instance, but on 5 March 2010 the Court of Appeal granted a stay. That left an interlocutory injunction extant, with security and cross undertakings in place until the happening of an event (the hearing and determination of a proceeding) that was outside the control and supervision of the court for so long as the stay remained in force.

8 By the time these applications were made an arbitrator of the issues in the proceeding had been nominated and accepted appointment. Prior to their submissions on the present applications, the parties were invited to consider the relevance of the stay to their applications. Their attention was directed in particular to the prospect of this court traversing the merit of some issues in the proceeding, albeit without making any final determination. Both sides urged me to proceed to hear and determine the applications, although AED Oil submitted that its application did not require any reconsideration of issues in the arbitration. It submitted that I should decline to reconsider the merits of the competing positions. Such a course, if followed, would have denied Puffin the opportunity to fully argue its application, which substantially depended upon a re-evaluation of the adequacy of security for its income tax claim.

9 In my opinion, the parties ignored the most important changes in circumstances since the injunction was granted in August 2009 - the continuing stay granted by the Court of Appeal, the fact that an arbitrator has been appointed, and the fact that the arbitral process had commenced. A hearing is very likely to take place around the middle of this year. In such circumstances it seems desirable that the arbitrator, who is to determine all issues in the proceeding, will assume responsibility for the protection of the related competing rights and interests including the moulding of any order for security; equally, it seems undesirable or inappropriate for this court to embark upon a reconsideration of the basis for the injunction or whether conditions should be modified. For so long as the stay remains in force, the event defining the outer limit of the injunction granted by this court, involving an adjudication of the tax dispute, is beyond the control and supervision of this court. On the other hand, the arbitrator has the power to bind the parties by an 'interim measure' under Chapter IVA of Schedule 2 of the International Arbitration Act 1974 (Cth). The arbitrator is uniquely well placed to consider whether to make orders to protect rights and to supervise such orders whereas this court is not.

10 Should an application be made to the arbitrator for relief, and to mould an order for security, the timing and duration of the arbitral hearing may be a very relevant consideration, as might the possibility of an early determination of an issue or issues to resolve the validity of Puffin's claims.

11 In these circumstances, I am firmly of the opinion that it is not appropriate for this court to continue to supervise the injunction, conditions and undertakings. That being so, the only course is to discharge the injunction, although not on the basis advanced by Puffin. No injustice is done to either party if the injunction is discharged, provided the parties are given an opportunity to seek adequate protection before the tribunal they have chosen to finally determine the issues in dispute between them. I propose to discharge the injunction, direct a return of all security to AED Oil and discharge the parties from their undertakings. Should Puffin hereafter seek to rely upon its rights under the charge it remains open for AED Oil to seek relief from the arbitrator. I will refrain from giving effect to these orders for 14 days, or such other period as the parties may agree, to provide them with an opportunity to consider their respective positions.

12 Notwithstanding my decision to discharge the injunction for the reasons given, I have proceeded to consider the applications on their merits, not just in deference to the lengthy and detailed submissions that were made, but in the event that my decision to discharge is held to be wrong, and I am required to determine the applications on their merits.

13 AED Oil is in the business of oil exploration and production. It is incorporated in Australia. AED Oil has or shares exploration and production rights in the Southern Timor Sea and elsewhere. Until about 1 July 2009 Puffin supplied the Front Puffin to AED Services under the Charter Contract. The tanker had been converted into an FPSO by Puffin between late 2006 and mid 2007 for the purpose of the Charter Contract. The FPSO, when deployed in the Puffin North East oil field, utilised an APL buoy and swivel arrangement and was connected by a sub-sea manifold to two production wells. Production commenced on 6 October 2007.

14 The Charter Contract was initially made between AED Oil and Puffin. On 17 May 2007 the contract was novated to AED Services under a Deed of Novation and Amendment. The novation agreement included mutual releases and discharges and the conferral of rights so as to give effect to the novation. There was a condition precedent. AED Oil was required to enter into a guarantee in a prescribed form in favour of Puffin under which it promised to guarantee the obligations of AED Services under the Charter Contract.

15 Under the Deed of Novation and Amendment the parties acknowledged that Puffin's rights under or pursuant to the charge remained in full force and effect. The charge became enforceable upon an Event of Default, which was a failure to pay any of the Secured Moneys when due and payable. Secured Moneys was defined as all debts and monetary liabilities of AED Services to Puffin on any account under or in relation to any Transaction Document and in any capacity. The guarantee given by AED Oil was a Transaction Document.

16 In March 2008 East Puffin Pty Ltd, a subsidiary of Sinopec International Petroleum Corporation, acquired a 60% interest in AED Oil's Puffin project. As a consequence, East Puffin became project operator. Although East Puffin held the dominant position in the joint venture and was project operator, AED Services remained the party contracted to Puffin under the Charter Contract and liable to indemnify Puffin in respect of tax liabilities.

17 A dispute over the preparation of income tax returns continues to inhibit the filing of returns by Puffin. The dispute has a number of curious twists. They include the right of AED Services to manage the tax obligations of Puffin (the party liable to file income tax returns and primarily liable for income tax and GST) and Puffin's contention that it is liable for more than $30 million of income tax and interest, whereas AED Services contends, that upon a proper analysis of Puffin's tax obligations, Puffin is not liable for any income tax.

18 AED Services and its legal and accounting advisers calculated Puffin's income tax liability based upon an approach to the depreciation of the FPSO that assumed the asset, or parts of it, should be depreciated by reference to the anticipated life of the Puffin oil field in which the FPSO had been deployed. On the other hand Puffin, and its legal and accounting advisers, contended that depreciation should take place over a longer period which, if applied in the calculation of income tax, would expose Puffin to a liability to income tax and interest in the sum of $34,642,122. While the parties have adjusted their positions from time to time it has been apparent, since the commencement of the proceeding, that the income tax dispute is substantially concerned with differences over depreciation.

19 A claim under the tax indemnity was integral to Puffin's demands on AED Oil under the guarantee. Without an indemnity, Puffin's tax liability would be of no consequence to AED Services, or to AED Oil as guarantor. The centrality of the indemnity was not overlooked by AED Oil in its application for an injunction. It argued that there was a serious question to be tried as to whether Puffin had lost its right to claim under the indemnity. AED Oil alleged a failure by Puffin to comply with obligations under the Charter Contract to provide assistance to enable AED Services to manage Puffin's tax affairs, and that it had breached an obligation to refrain from making any admission in relation to its tax liability. AED Oil submitted that those breaches had the effect of disqualifying Puffin from any entitlement to the indemnity.

20 Article 15 of the Charter Contract established a regime under which Puffin was to derive its revenue net of any tax. Any tax liabilities incurred by Puffin, as a consequence of payments received from AED Services, were to be ultimately borne by AED Services. This commercial arrangement was achieved in part by an obligation imposed on AED Services under article 15.4 to indemnify Puffin in respect of any and all "Tax Claims", which was defined to mean:

... any assessment, notice or demand or any other document issued or action taken by or on behalf of any governmental authority or any form of self-assessment from which it appears that the Contractor is subject to, ought to be made subject to, or might be subject to any obligation to make a payment under a Tax Law including without limitation any notification of a risk review or audit by a governmental authority administrating a Tax in any jurisdiction.

21 It was common ground that Puffin was amenable to Australian taxation laws in respect of the work undertaken by the FPSO. The Charter Contract included general obligations of Puffin to comply with Australian taxation laws and, in order to protect AED Services' ultimate liability, to minimise taxation. To augment those more general obligations, the parties agreed that AED Services would manage Puffin's tax responsibilities, including the preparation and filing of returns. Puffin was limited in what it could do, and was exposed to the risk of losing its right to indemnity if it engaged in proscribed conduct without authorisation from AED Services.

22 Article 15 to the Charter Contract is important. Relevant clauses are set out below:

15.1 The Contractor [Puffin] agrees to:

(a) maintain residence, for taxation purposes in Malta, Singapore or such other jurisdiction as agreed between the Company [AED Services] and the Contractor;

(b) to comply with its obligations under the laws of Australia and Malta, including (without limitation) the payment of all Taxes within the times required, obtaining all applicable registrations for Tax purposes, providing Tax Invoices and lodging all prescribed Tax Returns to ensure compliance with the laws of Australia and Malta to the extent such action is not able to be legally undertaken by the Company in accordance with clause 15.9;

(c) at the request of the Company, negotiate with the Company in good faith and use reasonable endeavours, including without limitation the provision of all information, the prompt execution of documents and the arrangement of its financing, to ensure that allowable deductions, credits, refunds and rebates are available to the maximum extent and to minimize to the extent legally possible any Australian and Maltese Taxes associated with the Services.

...

15.4 Subject to this Article 15, the Company shall indemnify and hold the Contractor harmless from and against any and all Tax Claims including without limitations any withholding tax on any payment by the Contractor to a Related Body Corporate, whether in the form of dividend payments or otherwise, with respect to Taxes imposed under Australia, Singapore, Malta, as well as under any other jurisdiction (Tax Indemnity).

15.5 The Company shall not be liable to indemnify the Contractor under the Tax Indemnity for any Tax claim which arises as a result of, or in respect of, or by reference to:

(ii) the Contractor's failure to comply with Article 15.1(a), 15.9(ii) and 15.10 of this Contract.

...

15.8

(i) Subject to Article 15.8(ii), where the Company is liable to make any payment under the Tax Indemnity, the due date for the making of that payment (Due Date) shall be the date falling seven days after written notice has been served on the Company demanding that payment under the Tax Indemnity.

(ii) In a case that involves an actual payment of Tax by the Contractor, the Due Date shall be the later of the date falling seven days after written notice has been served on the Company demanding that payment under the Tax Indemnity and the date on which the Tax in question would have had to have been paid to the relevant Tax authority in order to prevent a liability to interest or a fine, surcharge or penalty arising in respect of the Tax liability in question.

...

(vi) Prior to the Due Date, the Company shall on a monthly basis pay to the Escrow Agent an amount equal to the Taxes deemed to have been incurred in the previous month (Deemed Taxes). The Deemed Taxes will be held by the Escrow Agent under an escrow agreement to be prepared which contains usual and reasonable provisions for an arrangement of the type contemplated but otherwise in accordance with this Article 15.8. The Deemed Taxes shall be calculated by the Contractor and the calculation shall be submitted to the Company with all necessary information to understand and evaluate the calculation. The Company shall pay the Deemed Taxes to the Escrow Agent within seven days of the receipt of the calculation.

(vii) The Company's payments under the Tax Indemnity shall be made from the accumulated amount of Deemed Taxes. If the payment under the Tax Indemnity exceeds the accumulated amount of Deemed Taxes, the balance shall be paid by the Company to the Contractor in accordance with this Article 15.8. If the accumulated amount of Deemed Taxes exceeds the payment under the Tax Indemnity, the balance shall be credited to the Company when calculating next month's Deemed Taxes.

15.9

(i) The Company will, on behalf of the Contractor, undertake, manage and control the conduct of any action required in relation to the Contractor's obligations to comply with Tax Law, including without limitation, the preparation and filing of Tax Returns and making of any applicable registrations for Tax purposes.

(ii) The Contractor must provide the Company with all assistance and information required to enable the Company to satisfy its obligations under Article 15.9(i).

15.10 If the Contractor becomes aware of any circumstance which is likely to give rise to a claim under the Tax Indemnity, the Contractor agrees to give or cause to be given written notice of the Tax Claim (as the case may be) to the Company within a reasonable time.

(i) The Company will assume the conduct of any action in respect of a Tax Claim and the Contractor shall take such action as the Company may reasonably request to avoid, dispute, defend, resist, appeal or compromise any Tax Claim.

(ii) The Contractor must not:

(a) accept, comprise or pay;

(b) agree to arbitrate, comprise or settle; or

(c) make any admission or take any action in relation to a Tax claim.

without the Company's prior written approval, which must not be unreasonably withheld or delayed.

23 Production from the oil field began to fall sharply in late 2007, declining from about 27,000 barrels per day in October 2007 to about 1,000 barrels per day by July 2008. AED Services terminated the Charter Contract on or about 1 July 2008. The termination resulted in claims and counterclaims which are the subject of separate arbitration proceedings.

24 On 29 May 2009, shortly prior to termination, Puffin made a written demand on AED Services in relation to estimated income tax, claiming the amount of $12,597,977 for the income year ended 30 June 2008 plus interest, and a further sum of $22,855,080 which it required to be paid into an escrow account against an anticipated liability for the income year ended 30 June 2009.

25 On 10 July 2009 Puffin made a further demand on AED Services in relation to its calculated liability for GST for the period 1 August 2007 to 31 May 2009, in the sum of $24,596,021.57 including interest, and required a further sum of $753,513.95 to be paid into an escrow account. On 14 July 2009 Puffin made a further demand on AED Services for overdue invoices in the sum of $2,640,008.60.

26 By 11 August 2009 Puffin had revised its estimate of its liability for income tax. On that day it made a demand on AED Oil under the guarantee for estimated income tax in the sum of $21,251,000 including interest, and also required payment of $26,748,000 into an escrow account. That demand included the amount referable to GST which remained uncharged, and a revised demand for $2,680,183 in relation outstanding invoices.

27 Each demand served on AED Oil alleged that AED Services was in default under the Charter Contract, demanded immediate payment, and drew attention to the fact that in default of payment Puffin was entitled to exercise its rights under the charge.

28 In support of its case for serious questions to be tried, AED Oil challenged the validity of the claims and notices of demand, advancing the following propositions, which were more or less reflected in its Statement of Claim:

(a) The Tax Indemnity arose only in respect of Tax Claims as defined in the Charter Contract. There was no Tax Claim in relation to income tax, or GST.

(b) Even if there was a Tax Claim, Puffin had no right to a Tax Indemnity because of its failure to comply with relevant obligations under the Charter Contract.

(c) There was no occasion for any payment of tax to an Escrow Agent under the Charter Contract.

(d) There was an unresolved dispute about liability under the alleged unpaid invoices.

(e) Thus, there was no Event of Default under the charge.

29 AED Oil submitted that, if a receiver were to be appointed, the effect would be catastrophic and damages would never have been an adequate remedy. It submitted that the balance of convenience wholly favoured the grant of an injunction without conditions.

30 At the hearing of the application for an injunction, Puffin submitted that its own assessment of liability for income tax was a Tax Claim for the purpose of cl 15.4. Consequently, payment under the Tax Indemnity was required on the Due Date under cl 15.8(1) of the Charter Contract. Puffin also submitted, as a second limb supporting its demands for estimated income tax, that its estimates were Deemed Taxes for the purpose of cl 15.8(vi). At the time of the application for an injunction, no Escrow Agent had been appointed and no escrow account established. AED Oil submitted that the obligation to pay Deemed Taxes did not arise unless and until there was a Due Date, which in turn depended upon activation of the Tax Indemnity which only existed if there was a Tax Claim. I found that there was a serious question to be tried in respect of the validity of the claims made by Puffin and thus the demands.

31 In August 2009 Puffin had submitted that it was unfairly exposed to risks associated with AED Oil's loss of revenue from production in the Timor Sea. At that time, AED had cash reserves estimated to be a little under $100 million, but with a risk of significant depletion. Its revenue source had evaporated and it was faced with significant ongoing expenses. I concluded,

1. There are future revenue opportunities available to the plaintiff but, as with any business undertaking, nothing is certain. I am not persuaded that the defendant should stand by and wait to see if the plaintiff revives its revenue-generating capacity where there is substantial debt, which unless renegotiated is capable of significantly eroding the plaintiff's cash position.
2. Nor am I not persuaded that the defendant should be expected to rely upon the asserted value of the Puffin oilfield at $1 billion, when the plaintiff's production from the field has ceased. I do not think that the defendant should be expected to rely upon a contractual obligation from the joint venture partner to the plaintiff as a source of funds to meet demands.
3. In my view, the injunction should be made subject to conditions which will ensure: first, that the plaintiff's obligation to manage the defendant's tax liability is performed, and that the defendant fully co-operates with the plaintiff in that regard; second, that the defendant has some measure of real protection against its tax liabilities which the plaintiff is bound to pay.
4. I do not propose that the plaintiff be required to give security in the form of cash or a bank guarantee for the whole of the amount sought by the defendant. I would, however, require a payment into court or a bank guarantee in favour of the relevant court officer, to the extent of the GST liability as presently calculated by the defendant's accountants together with the outstanding invoices. I will not add to those sums the claims for interest.
5. This approach to the moulding of conditions is multifaceted. It is fundamentally designed to ensure that the consequences of the injunction to protect the plaintiff will not unfairly prejudice the defendant. I have also formed a view that the defendant's claim for GST and the invoices is significantly stronger than for income tax.
6. I regard the defendant's claim for income tax, based on its own assessment, as weak. There is also the real dispute about the amount; whereas there is no such dispute in relation to GST. Further, requiring the plaintiff to make the payment or provide the security, will ensure that the plaintiff will expedite its tax responsibility and that the defendant will co-operate. I would also impose specific conditions regarding the preparation of income tax returns, and compliance with other obligations to the revenue to assist in crystallising tax liabilities for the defendant and the liability of the plaintiffs to indemnify the defendant.[1]

32 Final orders were pronounced on 27 August 2009, including an injunction restraining Puffin from taking any step to enforce the charge in reliance on an event of default constituted by the non-payment of any amount claimed in any of the notices. The injunction was granted subject to undertakings in the following terms:

The Plaintiff undertaking:

(1) To abide by any order the Court may make as to damages, which it appears to the Court that the Defendant has sustained by reason of this order.

(2) That by 4pm on Friday 28 August 2009 it will pay an amount into Court and/or to provide to the Prothonotary unconditional bank guarantees in the aggregate sum of $21,054,272.57. Any such bank guarantees shall be in a form approved by the Prothonotary so that any such guarantee may only be called upon if necessary and the proceeds applied by order of the Court in this proceeding. Such money and/or bank guarantees are provided for the purpose of securing the GST liabilities of the defendant referred to in the Notices of Demand described in order 1 below.

(3) That by 4pm on Friday 28 August 2009 it will pay a sum into Court and/or to provide to the Prothonotary unconditional bank guarantees in the aggregate sum of $3,161,308.35. Any such bank guarantees to be in a form approved by the Prothonotary so that any such guarantee may only be called upon if necessary and the proceeds applied by order of the Court in this proceeding. Such money and/or bank guarantees are provided for the purpose of securing payment of the unpaid invoices referred to in the Notices of Demand described in order 1 below.

(4) To do all that is reasonable to procure that AED Services Pte Ltd expeditiously does all in its power and control to procure that necessary registrations in respect of the Defendant's tax obligations are effected and the Defendant's tax returns and business activity statements for the relevant periods the subject of this proceeding are completed and lodged forthwith.

Further, the Defendant undertaking:

(5) To do all that is reasonable to ensure that necessary registrations in respect of the Defendant's tax obligations can be effected by the Plaintiff, and/or AED Services Pte Ltd, and the Defendant's tax returns and business activity statements for the relevant periods the subject of this proceeding can be completed and lodged forthwith by the Plaintiff, and/or AED Services Pte Ltd.

Communication with Commissioner of Taxation:

(6) The Court has expressed the opinion that it is reasonable for the Plaintiff to procure AED Services Pte Ltd itself, or for the Plaintiff itself, to inform the Commissioner of Taxation when filing the Defendant's income tax returns for the financial years ended 30 June 2008 and 30 June 2009 that there is an issue about the appropriate period of deprecation of the Defendant's FPSO, that different views have been expressed, and to indicate in general terms what those different views are.

33 At the time that the injunction was granted, directions were made for the filing and service of pleadings. The proceeding was adjourned to 2 October 2009 for further directions. On 2 October 2009 the court was informed that AED Services, then a defendant by counterclaim, proposed to make application to stay the whole or some part of the proceeding. Directions were made for the hearing of that application on 16 November 2009.

34 In the events that occurred applications for a stay were made by AED Oil and AED Services under s 7 of the International Arbitration Act 1974 (Cth) and s 53 of the Commercial Arbitration Act 1984 (Vic) and the inherent jurisdiction of the court. On 1 December 2009, I refused the applications[2] and on 3 December 2009 gave directions for an early trial of the proceeding to commence on 27 January 2010.

35 By summons dated 9 December 2009 AED Oil and AED Services made application to the Court of Appeal for leave to appeal against refusal of their application for a stay. By late December 2009 it was apparent that the parties would not be in a position to proceed to trial on 27 January 2010. On 22 December 2009 the trial date was vacated and directions made to accommodate foreshadowed applications to amend pleadings. Those applications were set down for hearing on 28 January 2010. On that day leave was granted to Puffin to file and serve an amended defence and counterclaim, but the anticipated applications by AED Oil to amend its statement of claim and defence to counterclaim, and by AED Services to amend its defence to counterclaim, were adjourned until 16 February 2010. Those applications were further adjourned to 19 February 2010 and then to 22 February 2010 when they were finally argued. On 11 March 2010 AED Oil and AED Services were granted leave to file and serve amended defences to counterclaim save for allegations which depended upon alleged representations made by Petter Hoie.[3] That decision was, however, overtaken by the judgment of the Court of Appeal, delivered on 5 March 2010, granting AED Oil and AED Services leave to appeal and ordering a stay of the proceeding.[4]

36 In the course of their submissions in support of their present applications, the parties directed a good deal of their attention to the events following the grant of the stay by the Court of Appeal. Their purpose was to explain what had transpired since that time, while casting the other as delinquent, obstructionist or contrary. Puffin highlighted the competing tax positions, emphasising the correctness of its own position and the unreasonableness of the position adopted by AED Services. It argued that AED Oil and AED Services had acted unreasonably by insisting that Puffin sign tax returns prepared by AED Services, and that they had delayed in the appointment of an arbitrator for the tax dispute. Puffin did not, however, submit that AED Oil had breached its undertaking to do all that was reasonable to procure that AED Services ensure that Puffin's tax returns were completed and filed. That being so, AED Oil submitted that a review of the evidence concerning the conduct of the parties, including the large volume of correspondence and other written documents passing between them, was unnecessary.

37 Shortly after the stay was granted by the Court of Appeal, Puffin nominated Mr McHugh QC AC as arbitrator of the tax dispute, but it was not until late November 2010 that AED Oil and AED Services accepted the nomination. Mr McHugh accepted the nomination and a preliminary conference was convened on 7 February 2011. A date for a final hearing has not yet been fixed, although possible dates in late May through until July were canvassed. A further directions hearing was scheduled for 3 March 2011.

38 The time taken to reach a point where there was agreement on the arbitrator was alarming, having regard to the significance of the issues between the parties; Puffin's statutory obligations; the continuing injunction; and the substantial security provided by AED Oil. I am also surprised that the Commissioner of Taxation has not taken a more active interest. It is not as if the Commissioner is unaware of the dispute, if only in very general terms. An application for an extension of time within which to file Puffin's returns had been refused.

39 In the absence of an allegation by Puffin of breach by AED Oil or AED Services of its undertaking, the intervening conduct was capable of explanation by each side according to its own paradigm. Each said that the other had acted unreasonably, primarily by reference to opposing tax positions. There was a fundamental paradigm clash that may be capable of resolution in the arbitration. Its resolution is not a matter for this court.

40 AED Oil presented its application as a straightforward variation of a condition that had been satisfied. Puffin's application was more complex. A resolution of the issues raised in Puffin's application required the court to traverse many of the issues for resolution in the arbitration. Puffin relied upon a material change in circumstances since the injunction was granted. The change or changes relied upon were not confined to a deterioration in AED Oil's financial position. Puffin relied upon the conduct of the AED parties since the injunction was granted, contending that they had not acted reasonably to ensure a crystallisation of Puffin's tax liability and thus AED Services' indemnity obligation.

41 Puffin submitted that the injunction had been predicated on the assumption that the cross-undertakings would result in the prompt filing of income tax returns on behalf of Puffin for the financial years ended 30 June 2008 and 30 June 2009. It submitted that the cash resources of AED Oil were rapidly diminishing through investment in speculative prospects, and that Puffin should not be exposed to a near worthless undertaking as to damages. Puffin submitted that, notwithstanding the court's refusal to require security for Puffin's estimated income tax liability in August 2009, the interests of justice now required such security to be given, if the injunction was to continue.

42 Puffin sought to augment its case by submitting that its claim for estimated income tax, made in the notices of demand, had greater merit than the court had attributed to that part of its case when the injunction was granted. Puffin sought to re-argue the merits of its 'estimated tax' claim. AED submitted that the court should not depart from its earlier conclusions that there were serious questions to be tried in relation to the validity of the notices of demand and, more particularly, the estimated claim for income tax.

43 When an application is made to discharge or vary an injunction, the authorities make it clear that circumstances must be demonstrated that make it appropriate to entertain the application. In Paras v Public Service Body Head of the Department of Infrastructure[5] Young J conveniently summarised the authorities. His Honour said,

The authorities indicate that the kind of exceptional circumstances that might attract the power of discharge or variation include where an interlocutory order was obtained by fraud or non-disclosure of material facts, or through an accident or mistake that occurred without the fault of the parties seeking the relief under O 35 r 7: see Wati v Minister for Immigration and Multicultural Affairs (1997) 78 FCR 543 at 549-551. The court's discretion to vary or set aside an order is to be exercised with great caution having regard to the importance of the public interest in the finality of litigation: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170 ('Brown') at 178; Baker v Beckett (unreported, Supreme Court of NSW, Cohen J, 26 May 1998) ('Baker'); and Chanel Ltd v FW Woolworth & Co Ltd [1981] 1 All ER 745 ('Chanel') at 751. Similar principles apply to the variation or discharge of final orders: see Autodesk Inc v Dyason (No 2) [1993] HCA 6; (1993) 176 CLR 300 ('Autodesk') at 302, 307, 309-310, 317-318 and 321. Further, as Spender J emphasised in Dudzinski in relation to O 35 r 7(2)(c), the rule is not an alternative to the appellate procedure in respect of interlocutory judgments, nor is it to be invoked for the purpose of allowing a party to present a case a second time to its better advantage. In my opinion, these principles apply, a fortiori, where the party applying for discharge of an interlocutory order seeks to reargue the issues that have already been determined by reference to additional evidence that was available to it on the earlier occasion but which it chose not to advance: see also Autodesk at 310 per Brennan J.

44 To similar effect, is the decision of McLellan J in Brimaud v Honeyset Instant Print Pty Ltd [6]

The private injustice and public undesirability of permitting the relitigation of matters already litigated once is recognised in a number of principles of law, notably the rules relating to res judicata and issue estoppel, the more flexible rules under the rubric of vexation and abuse of process illustrated in such cases as Stephenson v Garrett [1891] 1 QB 677 and Hunter v Chief Constable [1981] UKHL 13; [1982] AC 529, and the restrictive provisions governing the adducing of further evidence on the hearing of an appeal even by way of rehearing (see eg s75A(8) of the Supreme Court Act 1970).

Interlocutory orders, of their very nature, create no res judicata or estoppel, and the Court retains jurisdiction to set aside, vary or discharge an interlocutory order up to the time of the final disposition of the proceedings. However the general rationale of the principles last referred to applies even in the case of interlocutory orders. It would be conducive to great injustice and enormous waste of judicial time and resources if there were no limit on the power of a party to have any interlocutory application or order relitigated at will.

The over-riding principle governing the approach of the Court to interlocutory applications is that the Court should do whatever the interests of justice require in the particular circumstances of the case. In giving effect to that general principle, and in recognition of the public and private interests earlier referred to, rules of practice have been developed in accordance with which the discretionary power of the Court to set aside, vary or discharge interlocutory orders will ordinarily be exercised. Not all kinds of interlocutory orders attract the same considerations. For present purposes one may put to one side orders of a merely procedural nature (as to which see e.g. Wilkshire v Commonwealth (1976) 9 ALR 325) and injunctions (or undertakings) made or given by agreement and without contest "until further order" (as to which see e.g. Warringah Shire Council v Industrial Acceptance Corporation - McLelland J 22 November 1979 unreported).

In the present case I am dealing with an interlocutory order of a substantive nature made after a contested hearing in contemplation that it would operate until the final disposition of the proceedings. In such a case the ordinary rule of practice is that an application to set aside, vary or discharge the order must be founded on a material change of circumstances since the original application was heard, or the discovery of new material which could not reasonably have been put before the Court on the hearing of the original application (see Woods v Sheriff of Queensland (1895) 6 QLJ 163 at 164-5; Hutchinson v Nominal Defendant [1972] 1 NSWLR 443 at 447-8; Chanel v Woolworth & Co [1981] 1 WLR 485 at 492-3; Adam P Brown Male Fashions v Philip Morris [1981] HCA 39; 148 CLR 170 at 177-8; Butt v Butt [1987] 1 WLR 1351 at 1353; Gordano v Burgess [1988] 1 WLR 890 at 894).

The following passages illustrate the point: "The defendants are seeking a rehearing on evidence which, or much of which, so far as one can tell, they could have adduced on the earlier occasion if they had sought an adequate adjournment, which they would probably have obtained. Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter. The fact that he capitulated at the first encounter cannot improve a party's position." (Chanel v Woolworth & Co at 492-3 per Buckley LJ.) "A court must remain in control of its interlocutory orders. A further order will be appropriate whenever, inter alia, new facts come into existence or are discovered which render its enforcement unjust ...... . Of course the changed circumstances must be established by evidence (Adam P Brown Male Fashions at 178 per Gibbs CJ and Aickin, Wilson and Brennan JJ.)

45 It seems common ground that GST issues are now resolved, with the exception of a potential disputed liability to the ATO of $140,743. The position in relation to unpaid invoices is not so simple. By a notice of demand dated 11 August 2009, Puffin sought payment of outstanding invoices together with interest in the sum of US$2,680,183. In its statement of claim dated 17 August 2009, AED Oil sought a declaration that the amounts claimed were not 'AED Services Money Owing as that phrase is defined in the Guarantee'. A similar declaration is sought by AED Oil in the arbitration.[7]

46 AED Oil submitted that by failing to prosecute its claims for unpaid invoices in the arbitration, Puffin should be taken to have abandoned them, or it would be unjust for AED Oil to continue to be required to provide cash security in respect to such claims. Puffin submitted that it had not abandoned the claims and that they were part of the dispute referred to arbitration by reason of their inclusion in the notices of demand. While Puffin joined issue with AED Oil and AED Services over the validity of the notices of demand, it did not counterclaim to recover the amount of the unpaid invoices in the court proceeding. Puffin is scheduled to deliver its defence and any counterclaim in the arbitration by 23 February 2011.

47 The Puffin claims for unpaid invoices are not yet prominent as part of the matter to be resolved in the arbitration. That may change. The scope of the case in the tax dispute arbitration is not yet finalised. In the absence of such a claim it would be possible for all issues to be resolved without any resolution of Puffin's claim for unpaid invoices. For example, a declaration might be made to the effect that the demands were invalid without any determination of the merits of the invoices. I have the impression that the invoices may have been overlooked.

48 While there has been a very significant change in relation to the liability for GST, which justifies a return to AED Oil of the related security, Puffin continues to rely upon the unpaid invoices as a basis for the notices of demand. In my view there has been no material change in Puffin's reliance on the unpaid invoices since the injunction was granted and no basis to vary the security given in respect of the invoices.

49 Puffin's primary application was to have the injunction discharged. If the injunction was to be discharged all funds in court and guarantees would be returned to AED Oil and Puffin would no longer be enjoined from attempting to enforce its security. Having found that there were serious questions to be tried as to the validity of Puffin's claims, and the prejudice to AED Oil if Puffin were to be permitted to appoint a receiver, I held that an injunction was justified, subject to the provision of security the undertaking as to damages.

50 In my opinion there remain serious questions to be tried in relation to Puffin's claim for estimated tax and the validity of the notices of demand. Thus, unless Puffin is entitled to have the injunction discharged by reason of the changed circumstances, the issue for determination on its application is whether additional security should be provided by AED Oil in support of the undertaking as to damages, when such security was not required in respect of the income tax claim at the time the injunction was granted.

51 While Puffin's primary application was that the injunction be discharged, its substantive case assumed the continuation of the injunction, but with the imposition of new conditions requiring payment into court or delivery of bank guarantees to the value of $34,642,122. That is the amount of Puffin's estimate of its tax liability.

52 Puffin relied upon what it described as a fundamental principle - 'he who seeks equity must do equity'. While Puffin recognised the factual difference between the circumstances in Inglis v Commonwealth Trading Bank of Australia[8] and the present case, due to the challenge made to the validity of the notice of demand, and the underlying claims, it submitted that the general principle enunciated in that case was applicable. Walsh J said,[9]

A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court.

...

In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.

The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed.

In my opinion the fact that such claims have been brought provides no valid reason for the granting of an injunction to restrain, until they have been determined, the exercise by a mortgagee of the remedies given to him by the mortgage.

53 Where the amount in dispute or the validity of the charge is disputed, the protection afforded a mortgagee on an interlocutory application for an injunction seems to rest upon the possible inadequacy of the ordinary undertaking as to damages.[10] In CMG Equity Investments Pty Ltd v Australia and New Zealand Banking Group Ltd[11] Finklestein J said,[12]

The second point is a practical one. It concerns the undertaking in damages. Sometimes an undertaking is not enough to obtain an injunction. In Inglis v Commonwealth Trading Bank of Australia [1972] HCA 74; (1972) 126 CLR 161 at 164, a somewhat analogous case, Walsh J said that: "A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court".

The benefit of a mortgage would be greatly diminished if this was not the rule, for the risk of a change in the value of the mortgaged property would lie with the mortgagee and not with the mortgagor, which is where it should lie.

I accept that the usual rule should not be applied in the present case. The plaintiffs claim title to the shares not as mortgagor but as beneficial owners. Still, it would be wrong to restrain the sale of the shares without providing ANZ with full protection in the event that the plaintiffs lose at trial and the shares have fallen in value in the meantime.

Accordingly, as I indicated during the hearing, the plaintiffs would be required to put up by way of security in support of their undertaking either cash or an unconditional bank guarantee in an amount as close as possible to the likely bottom price of the shares in issue. That would require an assessment of the future performance of the share market, an exercise I would not undertake without a good deal of assistance from the parties. Fortunately, this task need not be undertaken because the amount required would be much more than the $1m proffered by the plaintiffs.

54 Where there is a challenge to the validity of a mortgage, or, as in this case, a serious challenge to the amount of the claim and the validity of the notice of demand, I would adopt, with respect, the general principle enunciated by Morling J in Glandore Pty Ltd v Elders Finance and Investment Co Ltd,[13]

I do not think that the present case is a case of the kind to which the general principle in Inglis' case applies. It falls more easily into the second class of case discussed by Sugerman J in Harvey v McWatters. This being so I am not constrained by authority to require the applicants to pay into court the whole amount of the mortgage debt as a condition of obtaining interlocutory relief. Rather I think the proper approach is to mould an order so as to ensure adequate protection to the mortgagee and to otherwise do justice between the parties during the period pending the final hearing.

55 The great difficulty confronting this court, if called upon to 'mould an order', is the magnitude of the gulf between the position of Puffin and AED Oil in relation to the construction of the Charter Contract and the competing estimates of income tax. The difference in relation to the competing estimates is driven by the opposing views on depreciation. This is not a case where a calculation might readily be made, as was contemplated in CMG Equity Investments, of an amount which ought to be paid into court as security so as to ensure that the grant of an injunction, or its continuation, does not unfairly deprive the mortgagee of the value of its security.

56 Puffin's case seemed to proceed on the assumption that in the face of the gulf between the parties over their respective positions, Puffin was required to give added certainty to the correctness of its position and claimed entitlement. Puffin implicitly recognised that in order to persuade the court to order new security in a sum equal to its estimated tax liability, when security for that claim had been refused in August 2009, it must do so to a high degree of certainty. It must demonstrate an entitlement sufficient to swing the balance of justice in its favour. Puffin was not content to rely merely upon the changed circumstances and the risk of a worthless undertaking as to damages. It set out to demonstrate that it had a strong claim to an indemnity for the amount estimated by it.

57 Puffin's position was in one sense uncompromising. Puffin submitted that the apparent gulf between the respective tax positions was of no consequence. It submitted that all that was required was its self-assessment, genuinely made, to established a right to a Tax Claim as defined in the Charter Contract. That argument was advanced in August 2009. I found that there was a serious question to be tried. That remains my opinion.

58 The amount of $34,642,122 was a self-assessment made by Puffin's accountants, PricewaterhouseCoopers, based upon assumptions and instructions at variance with the position adopted by AED Services. There were some relatively minor issues, such as the calculation and treatment of a GST component applicable to invoices, that might be capable of compromise, but the most significant issue remained the fundamentally different approach as adopted by the parties to depreciation.

59 At risk of over-simplifying the legislative regime, the owner of an asset, such as the FPSO, employed for oil exploration, has scope to depreciate the asset over a much shorter period of time than 15 years 'self-assessed' by Puffin. AED Oil argued that the basis for the financial arrangements between the parties was predicated on the depreciation of the FPSO over the life of the well. Furthermore, AED Oil argued, based on expert evidence and opinion, Puffin should self-assess the effective life of the vessel at six years and lesser periods for associated equipment, such as the mooring of the buoy and swivel system. The practical difficulty confronting AED Oil was that Puffin contended that the 'self-assessment' was to be made by Puffin, not AED Services.

60 Each party thought the position of the other was not reasonably arguable. If Puffin were to adopt the position recommended by AED Services, its tax liability would be nil. Puffin refused to accept that position, refuses to sign income tax returns prepared on its behalf by AED Services on that basis, and adhered to the position advocated by its accountants which, if reflected in income tax returns, would result in the liability for which Puffin seeks indemnity.

61 In the course of resisting AED Oil's application for an injunction in August 2009, Puffin advanced a second limb to its claim for estimated income tax. Puffin submitted that AED Services was required to pay the amount of tax, if called upon, to an Escrow Agent under article 15.8(vi). At the time there was no Escrow Agent or escrow account. AED Services has refused to appoint an Escrow Agent, contending that there is no occasion to do so. In this application Puffin sought to further develop its reliance on article 15.8(vi) to support an obligation by AED Services to pay the estimated amount of tax to an Escrow Agent.

62 Puffin submitted that article 15.8(vi) of the Charter Contract established an independent regime under which it was entitled to make an estimate of its tax liability and require AED Services to pay the estimated amount into an escrow account established for that purpose. It submitted that the regime was part of a risk sharing arrangement, designed to accommodate the circumstance where Puffin, although not immediately liable under a payment obligation, reasonably anticipated that one would arise. Puffin argued that in such circumstances it had the power to make a calculation which would form the basis of a valid demand for payment. While AED Services was entitled to information to enable it to understand and evaluate the calculation, a dispute as to the amount did not prejudice Puffin's right to demand payment to the Escrow Agent.

63 Puffin submitted that the opening words of Article 15.8(vi), 'Prior to the Due Date...' should simply be read as 'Before the Due Date...', indicating an acknowledgement that the estimation preceded the Due Date fixed by cl 15.8(vi). Puffin submitted that an obligation to pay Deemed Taxes to an Escrow Agent enlivened the Tax Indemnity. Accordingly, having made an estimate of its income tax liability for the financial years ended 30 June 2008 and 30 June 2009, and having required payment of those amounts to the Escrow Agent, the Tax Indemnity in respect of those amounts had been enlivened. Thus, Puffin argued, the estimates were not capable of challenge and were payable by AED Services and, on demand, AED Oil. Puffin submitted that as early as 29 May 2009 it had nominated Standard Chartered Bank, Singapore as an Escrow Agent under the Charter Contract.

64 AED Oil submitted that article 15.8(vi) was of no assistance to Puffin. It submitted that the clause required monthly demands for payment to 'the Escrow Agent'. There were no monthly demands. Furthermore, the Escrow Agent was defined to mean 'financial institution nominated by the Parties to hold the Security Amount in escrow for the benefit of the Contractor'. Article 12 of the Charter Contract provided a regime for security to be provided by AED Services to secure Puffin's claims against AED Services under the contract. The security amount, in the sum of US$30 million, was to be paid to the Escrow Agent after a loan made to AED Services by its bankers had been repaid. There was no evidence that an Escrow Agent had been appointed. Article 15.8(vi) also provided for an escrow agreement to be negotiated. There was no evidence of an agreement.

65 AED Oil submitted that it was under no obligation to appoint an Escrow Agent or create an escrow account. It submitted that there must first be a Due Date, but in any event the clause could not reasonably have been intended to apply to income tax, which could only be calculated after the close of a financial year.

66 AED Oil also submitted that the court should not reconsider the merits of the Escrow Agent argument merely because it was now advanced in a different or more sophisticated manner. It was, after all, a matter of construction. The facts had not changed, apart from AED Services' refusal to appoint an Escrow Agent, which AED Oil submitted was not unreasonable.

67 In my opinion the elaborate and reformulated argument advanced by Puffin to support its reliance on the Deemed Taxes as a liability to support a claim under the Tax Indemnity, while arguable, suffers from significant weaknesses. Clause 15.8(vi) may have a role in relation to a periodic calculation of GST, PAYG tax or even withholding tax. It might have application to the calculation of instalments of income tax which might become payable periodically in advance of the filing of an income tax return and an annual assessment. However, resort to article 15.8(iv), as a mechanism by which Puffin might call for payment of its income tax liability in respect of a concluded financial year, without having lodged income tax returns, seems clumsy and artificial. The 'monthly' demands anticipated by the scheme for the payment of Deemed Taxes to an Escrow Agent do not seem apt to create a liability on the part of AED Services to pay amounts estimated after the end of a financial year, as the tax payable in respect of that year, in the absence of filing an income tax return and receiving a notice of assessment which creates a Due Date.

68 Another, and perhaps more difficult aspect of Puffin's 'Deemed Taxes' argument, is that the amount so calculated is not an amount payable to Puffin. The amount is payable to the Escrow Agent, from whose account payments are to be made under the Tax Indemnity. It is difficult to characterise a failure to pay an amount of Deemed Taxes to the Escrow Agent as a default on the part of AED Services to pay Secured Moneys to Puffin.

69 Puffin compared the cash resources of AED Oil at the time the injunction was granted with the available resources at the time of these applications. According to a cash flow report prepared by AED Oil for the quarter ending 30 June 2009, it had cash on hand of $105.7 million. Puffin's accountants calculated the likely cash resources as at the end of March 2011 at around $15 million. AED Oil pointed out that new financing strategies were to be implemented which would result in cash inflows of US$20 million. Mr Little, the Chief Financial Officer of AED Oil, deposed on 9 February 2011 that,

This means that in addition to its cash-reserves of approximately $40 million AED Oil will have US$20 million available.

70 When making reference to cash reserves of 'approximately $40 million', Mr Little was apparently relying upon the quarterly cash flow report for AED Oil as at 31 December 2010. He conveyed the impression that as of the date of his affidavit sworn 9 February 2011, the cash reserves of AED Oil remained unchanged. Given the exploration business carried on by AED Oil, I regard it as highly improbable that the December quarter cash balance remained unchanged in February 2011. The failure of Mr Little to provide a further explanation concerning the financial position of AED Oil was troubling. The calculation made by PricewaterhouseCoopers, on behalf of Puffin, contained in a report dated 28 January 2011, estimated the movement of cash between 31 December 2010 and 31 March 2011. The conclusion of PricewaterhouseCoopers was that by 31 March 2011, AED Oil would have cash reserves of between $15.4 and $36.6 million, having regard to the additional cash flow of US$20 million from the issue of convertible notes. Mr Little did not challenge that opinion.

71 It was common ground that AED Oil was utilising its cash reserves to invest in new production opportunities. That is, after all, its business and it was not criticised for doing so. Puffin, however, submitted, with the aid of expert analysis, evidence and opinion, that the new investments were speculative in nature and should not be taken into account as adding material value to AED Oil for the purpose of assessing the value of its undertaking as to damages. On behalf of AED Oil it was submitted, with the aid of opposing expert analysis, evidence and opinion, that the investments made in new production opportunities were sound, and that the book value attributed to those investments added real value to the company. Mr Little compared AED Oil's market capitalisation as at 31 November 2009 ($84.31 million) with its market capitalisation as at 31 December 2010 ($81.54 million) concluding,

I believe this to be an objective demonstration of AED Oil's overall financial position remaining stable throughout its recent use of cash resources to purchase further assets.

72 It is a fact that the cash resources of AED Oil have been depleted since August 2009. I do not accept the submission of AED Oil that the value of its undertaking as to damages should be measured as if it was only obliged to meet 40 per cent of its share of any liability under the indemnity. That submission seemed to assume that AED Oil's joint venture partner was also 'on the hook' under the indemnity. I reject that analysis. Only AED Oil has given a guarantee and only AED Oil has given an undertaking as to damages.

73 Notwithstanding the book value attributed to new investments, the prospects are not yet realised. AED Oil does not have an income stream. Market capitalisation, as a measure of AED Oil's ability to meet any undertaking as to damages is no more than a reflection of investor confidence, based in part on information provided to the market by directors. If, as Puffin contends, it is entitled to call upon AED Services for the estimated tax amount, and make demand on AED Oil under the guarantee, there has been a material adverse change in the ability of AED Oil to meet that demand and the value of Puffin's security is threatened.

Changed circumstances - Preparation and filing of returns

74 Puffin's case for the introduction of a new condition as the price of a continuation of the injunction rests in part on a failure by AED Services to prepare income tax returns satisfactory to Puffin.

75 Puffin did not and cannot rely, as an event of default, upon the failure of AED Services to prepare satisfactory income tax returns. After all, an event of default under the charge means a failure to pay any of the Secured Moneys when due and payable by AED Oil or within three business days of its due date. Secured Moneys means all debts and monetary liabilities of AED Oil, as guarantor of the obligations of AED Services, to Puffin. While the debt or liability may be prospective, contingent or even unascertained, an event of default does not extend to a failure to prepare a satisfactory income tax return, even though the preparation and filing of such a return may give rise to a monetary obligation.

76 Puffin relied upon the failure of an expectation, supported by cross-undertakings, that satisfactory income tax returns would be prepared by AED Services on behalf of Puffin. AED Services has prepared and submitted income tax returns, but they were rejected by Puffin as inaccurate. The opposing positions seem irreconcilable. The outcome of the tax arbitration may resolve the impasse if, for example, it be found that AED Services is entitled to prepare and file the returns on behalf of Puffin. Alternatively, the dispute may be resolved if it be found that Puffin has lost its right to indemnity, in which case the basis for the demand made upon AED Oil will fall away. But, if the outcome of the tax arbitration does not result in a clear pathway for the filing of income tax returns by or on behalf of Puffin, little may be achieved in the arbitration to ensure that Puffin complies with its statutory obligation to file income tax returns.

77 In my view, Puffin's complaints about the failure of AED Services to prepare satisfactory income tax returns, in the absence of any maintainable case for breach of its undertaking, seems to be a distraction from the real issues on Puffin's application for new security. In the absence of a breach by AED Oil or AED Services of an undertaking to the court, Puffin's disappointment at the failure of the parties to resolve the impasse over the preparation of returns seems irrelevant to its present application.

78 But for the factors leading to my decision to discharge the injunction, leaving the protection of rights and interests dependent on a resolution of the issues in the arbitration to the arbitrator, I would direct that the amount or value, as the case may be, of the security provided to the court by AED Oil in respect of Puffin's claimed GST liability, be returned. I would not disturb the continuation of the injunction, nor would I order the return of the security paid in respect of the unpaid invoices. As for Puffin's renewed claim for security in the sum of its estimated liability for income tax, I would not require security in that amount or indeed any amount for income tax. I am concerned at the deteriorating cash position of AED Oil. But the imminent hearing of the tax dispute by the arbitrator, and my assessment of the strengths and weaknesses of Puffin's claim to an indemnity for the estimated income tax, lead me to conclude that justice and equity do not require AED Oil to provide any further security in support of its undertaking as to damages at this time.

[1] AED Oil v Puffin, extempore reasons delivered 20 August 2009, Judd J, Supreme Court of Victoria.

[2] [2009] VSC 534.

[3] [2010] VSC 65.

[4] [2010] VSCA 37.

[5] (No 2) [2006] FCA 652.

[6] (1988) 217 ALR 44.

[7] See Points of Claim dated 4 February 2011.

[8] [1972] HCA 74; (1972) 126 CLR 161.

[10] Harvey v McWatters (1948) 49 SR NSW 173, 177.

[11] [2008] FCA 455; (2008) 65 ACSR 650.

[13] [1984] FCA 407; (1984) 4 FCR 130.